Investors have shunned Latin America as concerns over Fed tapering absorbed capital flows that had flown out, chasing yield, during previous rounds of quantitative easing.
LatAm equities are down nearly 15% this year, having fallen dramatically from May to July, just as the yield on 10-year Treasuries shot up.
Yet it would be a mistake to count Latin America down and out, explained JPMorgan Chase JPM -1.92%’s CEO for the region Martin Marron, who says they remain particularly bullish on Mexico and expect the whole continent to continue to deliver for investors, as the emergence of a consuming middle class, along with stronger institutions and the development of South-South business fuels steady growth.
“Last year, we saw capital flows of about $98 billion into [Latin American] fixed income, and this year in the months to May we saw about $45 billion,” Marron told Forbes, noting the annualizing that figure would’ve taken this year above 2012.
“That has now fallen to $15 billion,” he adds, pointing to the effect of Ben Bernanke suggesting he would taper later in the year.
“No one is immune in a globalized world, but Latin America’s vulnerability to crises is dramatically lower [than a decade ago],” Marron explains. In the past, nations would’ve defaulted, regimes would’ve changed, he noted, today, we see lower interest rates to ease monetary conditions.
A lot has changed south of the U.S. border in the past decade, with countries like Brazil and Mexico seeing their economies expand dramatically on the back of rising imports and improving terms of trade, courtesy of a weaker dollar and an ever hungry China, both literally and metaphorically.
Brazil is now a $2.4 trillion economy, the eighth largest in the world, while Mexico’s GDP climbed to $1.8 trillion last year, the twelfth biggest.
That economic expansion was a consequence of the reforms set in place in the 1990s, according to Marron, who has helped JPMorgan build a workforce of about 2,000 employees in Sao Paulo, Brazil, making it one of his company’s principal global offices.
Foreign reserves have ballooned from a little more than $100 billion in 2001 to nearly $800 billion today, while central banks have introduced inflation targeting and orthodox monetary policy.
Furthermore, instead of continuing to rely on U.S. dollar debt, which wreaked havoc in the 80s and 90s, the economies of Latin America have developed internal capital markets with pension funds and other institutional players.
Democracy has been firmly established across the continent and the respect for private property and the sanctity of contracts in generally upheld. Global corporations have emerged, with mega cap miner Vale VALE -0.37% as one of the major examples.
But Carlos Slim’s America Movil is another example, as are Petrobras PBR -3.38% and Mercado Libre. Recently, Colombian billionaire Jaime Gilinski, along with Mexican financier David Martinez of Fintech became major shareholders of Banco Sabadell, one of Spain’s largest banks, in a transaction that would’ve appeared impossible at the turn of the century.
Corporate bond issuance has surged as major central banks have adopted QE, hitting almost $100 billion last year, while FDI inflows are expected to close this year around $151 billion. Brazil has been the poster child of Latin American progress.
“They have kept the three pillars of development intact: fiscal responsibility, floating exchange rates, and inflation targeting, for five straight presidential administrations,” Marron explained.
Despite major protests over the summer, there is no risk of anything remotely close to a coup, he concludes, as the population simply wouldn’t stand for it. It’s not all hunky dory, though. China is no longer growing 10% a year, while the reemergence of the U.S. and Europe bring major competitors back into play.
Terms of trade won’t remain as favorable, and domestic demand will erode export capacity. Yet Latin America nations will continue to become increasingly involved in the global economy.
JPMorgan is trying to understand the future dynamics of South-South business, with offices in Singapur, London, New York, and Miami working directly with Sao Paulo.
Mexico, though, is where the biggest opportunities arise, according to Marron. Beyond the economic recovery in the U.S., Mexican President Enrique Peña Nieto is pushing forth with market friendly reforms that “have significantly changed the country’s GDP potential.”
Beyond education reform, fiscal reform, and a reduction in union power, Peña Nieto is putting his weight behind an all-important energy reform that will see state-owned oil giant Pemex open up to foreign investment.
Oil production has plummeted as Pemex has failed to make substantial new discoveries, while global firms are increasing output in the U.S. side of the Gulf of Mexico. Shale and other unconventional oil could lead to further riches.
Beyond nations like Argentina, Ecuador, and Venezuela, most of Latin America is integrating with the world economy.
And Argentina, the third or fourth largest economy in the region, depending what exchange rate one uses, could begin that move after elections next year.
The opportunities for investors are there, particularly as the FIFA World Cup and the Olympics descend on Brazil. And while risk remains, some, like JPMorgan, remain very bullish.
forbes.com
LatAm equities are down nearly 15% this year, having fallen dramatically from May to July, just as the yield on 10-year Treasuries shot up.
Yet it would be a mistake to count Latin America down and out, explained JPMorgan Chase JPM -1.92%’s CEO for the region Martin Marron, who says they remain particularly bullish on Mexico and expect the whole continent to continue to deliver for investors, as the emergence of a consuming middle class, along with stronger institutions and the development of South-South business fuels steady growth.
“Last year, we saw capital flows of about $98 billion into [Latin American] fixed income, and this year in the months to May we saw about $45 billion,” Marron told Forbes, noting the annualizing that figure would’ve taken this year above 2012.
“That has now fallen to $15 billion,” he adds, pointing to the effect of Ben Bernanke suggesting he would taper later in the year.
“No one is immune in a globalized world, but Latin America’s vulnerability to crises is dramatically lower [than a decade ago],” Marron explains. In the past, nations would’ve defaulted, regimes would’ve changed, he noted, today, we see lower interest rates to ease monetary conditions.
A lot has changed south of the U.S. border in the past decade, with countries like Brazil and Mexico seeing their economies expand dramatically on the back of rising imports and improving terms of trade, courtesy of a weaker dollar and an ever hungry China, both literally and metaphorically.
Brazil is now a $2.4 trillion economy, the eighth largest in the world, while Mexico’s GDP climbed to $1.8 trillion last year, the twelfth biggest.
That economic expansion was a consequence of the reforms set in place in the 1990s, according to Marron, who has helped JPMorgan build a workforce of about 2,000 employees in Sao Paulo, Brazil, making it one of his company’s principal global offices.
Foreign reserves have ballooned from a little more than $100 billion in 2001 to nearly $800 billion today, while central banks have introduced inflation targeting and orthodox monetary policy.
Furthermore, instead of continuing to rely on U.S. dollar debt, which wreaked havoc in the 80s and 90s, the economies of Latin America have developed internal capital markets with pension funds and other institutional players.
Democracy has been firmly established across the continent and the respect for private property and the sanctity of contracts in generally upheld. Global corporations have emerged, with mega cap miner Vale VALE -0.37% as one of the major examples.
But Carlos Slim’s America Movil is another example, as are Petrobras PBR -3.38% and Mercado Libre. Recently, Colombian billionaire Jaime Gilinski, along with Mexican financier David Martinez of Fintech became major shareholders of Banco Sabadell, one of Spain’s largest banks, in a transaction that would’ve appeared impossible at the turn of the century.
Corporate bond issuance has surged as major central banks have adopted QE, hitting almost $100 billion last year, while FDI inflows are expected to close this year around $151 billion. Brazil has been the poster child of Latin American progress.
“They have kept the three pillars of development intact: fiscal responsibility, floating exchange rates, and inflation targeting, for five straight presidential administrations,” Marron explained.
Despite major protests over the summer, there is no risk of anything remotely close to a coup, he concludes, as the population simply wouldn’t stand for it. It’s not all hunky dory, though. China is no longer growing 10% a year, while the reemergence of the U.S. and Europe bring major competitors back into play.
Terms of trade won’t remain as favorable, and domestic demand will erode export capacity. Yet Latin America nations will continue to become increasingly involved in the global economy.
JPMorgan is trying to understand the future dynamics of South-South business, with offices in Singapur, London, New York, and Miami working directly with Sao Paulo.
Mexico, though, is where the biggest opportunities arise, according to Marron. Beyond the economic recovery in the U.S., Mexican President Enrique Peña Nieto is pushing forth with market friendly reforms that “have significantly changed the country’s GDP potential.”
Beyond education reform, fiscal reform, and a reduction in union power, Peña Nieto is putting his weight behind an all-important energy reform that will see state-owned oil giant Pemex open up to foreign investment.
Oil production has plummeted as Pemex has failed to make substantial new discoveries, while global firms are increasing output in the U.S. side of the Gulf of Mexico. Shale and other unconventional oil could lead to further riches.
Beyond nations like Argentina, Ecuador, and Venezuela, most of Latin America is integrating with the world economy.
And Argentina, the third or fourth largest economy in the region, depending what exchange rate one uses, could begin that move after elections next year.
The opportunities for investors are there, particularly as the FIFA World Cup and the Olympics descend on Brazil. And while risk remains, some, like JPMorgan, remain very bullish.
forbes.com
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