LatinFinance - March/April 2014 - 23

more attractive," says Rahman.
investors in local currency bonds with more long-term horizons
have stayed put, according to a recent report by Scotiabank.
"Spreads in hard currency bonds are really quite low, so i think
that's why many of our clients have started looking at local currency
bonds anyway," says Joe Kogan, head of emerging markets strategy
at Scotiabank.
the question now, more than before, is their level of comfort over
the exchange rate in individual markets - a factor heavily influenced
by policy. "the good news is that investors are not decreasing their
positions indiscriminately. motivated perhaps by economic reforms
and the potential for ratings upgrades, investors have not reduced
positions in mexico," the Scotiabank report said.
Roberto Sanchez-Dahl, senior portfolio manager at manulife,
says that investment choices will now become ever more a function
of an economy's inherent strengths. "the whole issue is about
fundamentals. You have to be selective in terms of where you put
your investments. now it's the time to do much more thorough
credit work overall. if you expect the currency to depreciate more

RobeRto Sanchez-Dahl, Manulife

"The whole issue is abouT
fundamenTals. You have To be
selecTive in Terms of where
You puT Your invesTmenTs.
now iT's The Time To do much
more Thorough crediT work
overall. if You expecT The currencY To depreciaTe more aggressivelY, Then whaTever You
maY be geTTing on The bonds is
going To be wiped ouT"

Paying the price
Change in 10-year bond yields 21 May 13 - 31 Jan 14
400%

Local currency

350%

Foreign currency

300%
250%
200%
150%
100%
50%
0%

BRA

COL

PER

MEX

Source: Fitch, Bloomberg

aggressively, then whatever you may be getting on the bonds is
going to be wiped out."
But the biggest period of volatility may be over, says SanchezDahl. "it's going to be event-driven in the future," he says.
the economic fundamentals of individual latin american
countries may therefore be more of a guiding force for portfolio
managers in the coming era - more than price differentiations and
general sentiment towards emerging markets as a whole.
investors say that a period of differentiation is underway, where
sovereigns with the stronger macroeconomic fundamentals
and higher ratings will still attract interest in their local currency
sovereign debt, while countries with weaker fundamentals will
increasingly struggle to do so.
colombia is perhaps in the camp of the less impacted. foreign
investors increased their positions in local currency sovereign
bonds in colombia in the first month of the year, bucking
the downward trend seen in emerging markets: its strong
fundamentals are fueling interest in the country's local debt, says
michel Janna at the country's debt office.
Janna says colombia plans to sell 30.3 trillion pesos ($14.8 billion)
of debt this year - almost the same amount it sold in 2013 - and
that despite the emerging markets rout, he expects foreign holdings

to increase gradually until they reach 15% to 20%.
last year, foreign investors increased their positions in colombia's
local currency debt to 6.8% from 2% previously - in part because it
slashed the withholding tax on foreign buyers of local bonds to 14%
from 33% in late 2012. the country received inflows in every quarter
of 2013, says Janna.
But it is perhaps above all mexico and Brazil - latin america's two
economic powerhouses - that will likely illustrate the rift in investor
sentiment toward the region's sovereign debt most clearly. the two
countries show how nuanced the region has become for investors.
While many investors say they will likely stay away from the
Brazilian local currency bond market amid uncertainties in the runup to the october presidential elections and the expected slowdown
during the fifa World cup, mexico's strong fundamentals are
helping the country stand out from the rest of latin america.
HSBc's latam fixed income strategist alejandro martínez-cruz
says mexico will sell more local paper this year than in 2013. mexico
will continue to gain 20% of its financing needs in foreign currency
and 80% in pesos, as it has done in the past few years, says martínezcruz. But in gross terms, local currency bond issuance should
increase by 33% versus last year to reach 570 billion pesos ($43
billion), he says.
"in terms of offer there is more paper being issued and the
appetite of investors has increased because mexico's rating was
raised recently," martinez-cruz says. "the macroeconomic
framework is favorable and the expectations in relation to the
reforms are good."
in the wake of currency depreciation, investors can also now
acquire local currency bonds more cheaply. HSBc also expects the
peso to appreciate slightly, which bodes well for demand for the
country's local currency debt.
HSBc forecasts the peso ending 2014 at 1,260 pesos per dollar.
"We're at 1,320 now [...]. mexico is still one of our favorite countries,"
martinez-cruz says. LF
March/April 2014 - l atinfina nce.com 23

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