LatinFinance - March/April 2014 - 14

COVER
STORY
Latin America's capital markets are facing a sell-off in emerging
markets as indiscriminate as the bull phase it succeeded. But as returns
dwindle, asset buyers will have to become more discerning.
By Dominic O'Neill

Finding
fortune
T

o many, a brutal new year's sell-off in emerging market assets seemed to entrench a
view that the biggest risk to financial stability now sits in the emerging world - including Latin
America.
Average yields in JPMorgan's benchmark index of emerging market local currency
government bonds reached 7.2% at the end of January, up from 5.2% in April last year, and
compared to yields on 10-year US Treasuries still less than 3%. Within the region, Argentina
was forced to a 23% devaluation of the peso in January, its biggest since 2002.
By the end of February, average yields in the emerging markets bond index had returned
to below 7%. Currencies rallied: the South African rand and the Turkish lira, as well as the
Brazilian real, one of the currencies that has been most vulnerable. But to some, the rebound
remained a dubious one.
The recovery is unlikely to be sustained, says Jan Dehn, head of research at emergingmarkets fund manager Ashmore: it was predicated on weak US economic data and dovish
comments from the new Federal Reserve chairwoman Janet Yellen, rather than on a fresh
conviction that that the core emerging markets could withstand more rapid withdrawal of US
quantitative easing - the more rational view, according to Dehn.
"The 'end-of-the-emerging-markets-era' trade is still there," says Dehn. "The underlying
rationale [for the sell-off ] has not been countered."
Despite more responsive policy signals during the early months of 2014 - including a 44
billion real cut to Brazil's 2014 budget - even permanent emerging-market bulls like Dehn do
not expect an immediate return to a time when Latin America and other emerging markets
were a one-way bet and investors almost seemed to think they could do no wrong.
"It's going to be a volatile year," says Larry Brainard, co-founder of London-based emerging
markets research and consultancy Trusted Sources. Benoît Anne, head of emerging market

14 L ATINFINA NCE.COM - March/April 2014

strategy at Société Générale, also predicts
what he calls purgatory, after the doom of
early 2014 and before what he calls a bloom
phase to come.
Up to late February, there has been less
evidence of a wholesale exit from emerging
equities as compared to local currency
bonds, says Brainard. But as LatinFinance
discusses in the following pages, all is not
well in regional stocks. By late February,
the MSCI Emerging Markets index is down
just under 7% in 2014. Latin America has
underperformed other emerging regions
over the past year.
Mathieu L'Hoir, equities strategist at AXA
Investment Managers in Paris, says stocks
in Latin America could see a further 25%
decline, as currency depreciations and
defensive rate hikes will exacerbate slowing
economic growth, hitting corporate
earnings - while skittish investors will push
prices, as in the late 1990s, below fair value,
he says.
"We see a painful adjustment process
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