EQUITIES LATIN AMERICA
Latin America
Brazil and China indices – 1-year perf’nce
EM fund performance vs indices
3 mths 6 mths 1 yr 3 yrs 5 yrs 10 yrs
MSCI World 1.25 -8.48 -1.73 8.98 0.36 0.74
MSCI Brazil -6.96 -17.03 -18.75 20.22 12.14 17.47
MSCI China
China/Greater
-9.72 -21.68 -23.57 10.84 7.24 10.85
China funds -9.8 -20.5 -22.39 17.21 9.69 13.78
Global EM funds -6.65 -15.25 -15.08 21.17 7.34 13.45
Figures are annualised. Source: Morningstar
Brazil and China indices – 3-year perf’nce
%
10
0
% -10
-20
150
120
90
60
30
0
MSCI Brazil
-30
Dec ’10 Feb ’11 Apr
Source: Morningstar
MSCI China in
MSCI SCI China
Jun
MSCI Brazil
-30
MSCI World
Dec ’08 Jun ’09 Dec Jun ’10
Source: Morningstar
Aug
Dec
MSCI World
Oct
Jun ’11
Dec
Dec
Cast a wider net
In the pursuit of emerging market exposure, it is
easy to be blinkered by regional giants. But in the
same way there is more to Asia than China, there
is more to Latin America than Brazil
BY ESTHER ARMSTRONG
While emerging markets
have largely moved
in tandem with developed
markets, hopes for
a decoupling of the two
regions’ performances are
yet to be realised. What
is more, due to the higher
risk associated with investing
in emerging markets,
when investors enter a
risk-off phase, holdings in
emerging Asia and Latin
America are generally the
first to go.
In China, the perennial
debate of a hard versus
soft landing continues,
and signs of slowing GDP
growth have led to more
caution among investors
than was seen as little as
12 months ago, when the
country was tipped to drive
the global recovery. What
a difference a year makes.
Unsurprisingly, these
lower growth forecasts,
combined with investors’
risk-off sentiment, have
taken their toll on fund
flows into the region.
Statistics from EPFR Global
showed year-to-date outflows
of nearly $20bn
(£13bn) from Asia ex Japan
at the start of December,
compared to inflows of
$21.2bn in the first 11
months of 2010.
The move towards
lower growth forecasts has
also infected Latin America.
In Q3 2011, Brazil’s GDP
growth was 2.1%, a 0.04%
contraction from the previous
quarter and the lowest
rate in two years. Forecasts
for the country’s full-year
GDP rate have now edged
below 3%, which would
be a dramatic drop from
2010’s 7.5% growth rate.
Despite this, investor
sentiment towards Latin
America – and Brazil in
particular – is starting to
turn. In the final week of
November, Latin America
equity funds saw their biggest
weekly inflows since
late July, and Brazil equity
funds posted a 26-week
high of inflows.
Do these fund flows
suggest the balance is tilting
towards Latin America
as the favoured emerging
market region? If so, what
is convincing investors of
its appeal?
l Hegemonies
While China is the second
largest economy in the
world, the fact it is communist-run
has prevented
it from becoming the chief
investment target in Asia.
The use of capital controls
and the pervasion of stateowned
enterprises (SEOs)
on the mainland have
meant the more sophisticated
offshore market in Hong
Kong remains the easiest
way for investors to access
the market. Elsewhere in
the region, the relatively
open markets of India,
Indonesia, Taiwan, Korea
and Malaysia also entice
investors’ money.
In comparison, Brazil is
unquestionably the dominant
market within Latin
America. It is viewed as
one of the deepest and
most liquid markets in the
region and, since the creation
of the Novo Mercado
(new market) in 2000, has
led the way in requiring
higher corporate governance
standards from listed
companies. This position
as a regional hegemony
has some commentators
questioning the necessity
to look outside Brazil
when it comes to Latin
America investing.
l Brazil focus
Bryan Collings, lead manager
of the Hexam Capital
GEM Fund, says: “Brazil is
our largest country overweight
position in the
fund. Mexico is the only
other significant market in
South America but, when
you compare the fundamentals
of the two, Brazil
is much more attractive.
It displays higher growth
than Mexico, while valuations
are more appealing.”
Will Landers, senior
36 PORTFOLIO ADVISER [www.portfolio-adviser.com] JANUARY 2012
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