Latin Finance - July/August 2010 - 17

european buyside view

The Safest of Havens?
by Ben Miller urope entered the summer under a fresh cloud of sovereign debt woes, leaving LatAm assuming the unlikely role of safe haven. Many on the European buyside are confident LatAm can outperform other EM regions over the next five years. Policy improvement, central bank independence, transparency, tax reform, financial sector strength, abundant energy supply and developed local markets delight investors, bankers and analysts, although there is still much work to be done on many fronts. Most importantly, the region enjoys a strong financial system and almost none of the debt burden problems plaguing the developed world. With reforms and focused investment, Brazil in particular could outperform large Asian nations. “Latin America has an enormous opportunity, not just to cower in the corner and think ‘Oh yes, we’ve managed this crisis really well,’ but to take real advantage,” Jerome Booth, head of research at Ashmore, the UK-based EM investor with $33 billion in assets. “Latin American companies should be taking market share,” he adds. Booth, who is bullish both LatAm and China, says Chinese companies are expanding globally and poised for more expansion. The perennial EM optimist reminds investors not to talk about the credit crunch in the past tense, and that the risk of depression in developed markets is higher than it was a year ago – perhaps around 30%. In such a scenario, EM infrastructure offers a clear investment play, he says, and direct investment in that area should help the region achieve higher levels of sustainable growth. LatAm can benefit enormously from this situation, but there is still work to do if the region can outperform other EM.

As European sovereign risk ticks higher, the focus returns to opportunity in relatively stable markets like Latin America. Can it outperform other EM regions?
For example, Booth says the incoming administration in Brazil needs to focus on tax reform and boost infrastructure expenditure. Katia Bouazza, head of global capital markets for LatAm at HSBC, says most LatAm countries are poised for strong recovery in 2010. She does not expect this to be hampered by problems in Domestic Support Europe. HSBC is bullish on both LatAm A key strength of LatAm in investors’ minds and Asia, but one advantage for LatAm is the region’s ability to self-generate is liquid local debt capital markets, adds demand on the ground. “Everyone talks Bouazza. Booth sees strong local markets developing eventually in Asia’s bigger markets, and says they should achieve great scale when they finally arrive there. “Latin America has held up very well, particularly in high-yield bonds,” says Esther Chan, who helps manage $5 billion in EM bonds at Aberdeen Asset Management. She notes that LatAm corporate credit generally dropped 1-2 points from the end of April to early June, though a few names dipped more. Chinese corporate credit, by contrast, lost around 12 points, Indonesia 10 points, and CMEA 8-10 points, in the same period. Chan was speaking generally across ratings and tenors. “The local bond markets in Brazil rallied during May as the market became concerned with global growth,” says Sam LatAm beats other EM, says Chan Finkelstein, head of EM debt at Goldman Sachs Asset Management, which has $15 about growth in China but its growth is billion in dedicated EM investment. “This export driven, and not sustainable – its highlights the conviction that investors business model is warped,” said Maya have that these countries will continue Bhandari, head of EM analysis at Lombard to be able to pursue counter-cyclical Street Research. Brazil, by contrast, offers policies.” a more domestically-driven model. And Finkelstein, speaking in early June, she adds that there is more political risk in notes record inflows of the previous parts of Asia than in Brazil and Mexico. several months that demonstrated

July/August 2010

LatinFinance 17

Latin Finance - July/August 2010

Table of Contents for the Digital Edition of Latin Finance - July/August 2010