It is also a continent with abundant natural resources and investment opportunities that provide exposure to such resources. And finally valuations remain inexpensive compared to global averages. But further investment will only be encouraged if capital markets continue to deepen.
Both equity and bond markets within the region are providing an increasing universe of investment opportunities. On the equity side stockmarket-capitalisations-to-GDP ratios have increased significantly over the past decade in Latin America. But they are set to grow further as government privatisations, increasing equity issuance from companies, and the shift from bank lending to capital market borrowing continues. On the bond side the continued buyback or maturity of sovereign external debt coupled with the desire of governments to increasingly switch to local currency financing is changing the investment landscape for debt investors. For governments and companies this can lower the volatility for their debt servicing payments, and allow the development of more liquid, deeper and longer maturity local debt markets. Furthermore, local corporate bond markets will soon start to dwarf sovereign external debt markets given the increasing supply from local issuers.
Latin America will also see a continued surge in the development and use of derivatives and securitisations. As trading volumes in local markets increase so do the opportunities to provide derivatives and alternative investments in them. Most markets provide access to liquid FX and interest-rate forwards. Brazil and Mexico already have deep interest rate swap markets. Reforms and challenges in local markets provide opportunities for securitisation. The development of Mexico’s residential mortgage market to satisfy demand for a growing and necessary private housing sector has been aided by securitisation. In Argentina consumer loans, and also innovatively some of the energy sector, have been securitised. In Chile credit card securitisations have grown significantly.
However, some significant challenges still remain for investors. Many local stockmarkets remain under-diversified as a small number of local companies dominate local stockmarket capitalisations. Investor rights are also a concern so improving corporate governance, transparency and market regulations remain key to the longer term development of these markets. And finally while sovereign issues may offer growing liquidity, corporate assets trading within these markets can remain relatively illiquid. Such illiquidity can generally mean that these assets are more susceptible to volatility as a result of risk aversion.
John Cleary, chief investment officer at Focus Capital.
