The third quarter's stock market rally has led to a year-to-date return for the MSCI Latin America index of 15.3 per cent, easily outperforming developed stock markets and the Asia/Pacific region. Yet still the region continues to be attractive relative to developed markets, based on strong earnings growth and dividends prospects. Multiple expansion is not anticipated.
It is likely that the region will be sensitive to any weakness on Wall Street over the autumn in the face of oil/dollar concerns, although the global back ground of ongoing strong economic growth and low interest rates will offer support. So long as high oil prices exert a deflationary pressure, and do not trigger a wage-price inflationary spiral, low interest rates should support overall GDP growth.
But it is the region-specific factors that are of particular interest to investors. Rarely have so many things been going so well for the major economies. These include the first balance of payments surplus for the overall region in more than 40 years, thanks in particular to growing Chinese demand for raw materials and food stuffs.
The export-led recovery is fuelling domestic demand. Strong foreign investment inflows into the region leave room for net debt repayment as well as for modest foreign exchange accumulation. All the major regional currencies are floating.
Meanwhile a number of stable governments and sensible macroeconomic and fiscal policies have been established, with Venezuela perhaps the notable exception.
In Brazil, President Luiz Inácio Lula Da Silva has managed to retain his popularity while applying orthodox economic policies. With the aim of boosting growth, he has pushed important reforms through Congress, including modifying the overblown pensions system, and an overhaul of the taxation system is now being planned. Growth is broadening into a self-sustaining recovery after several years of poor performance. Second quarter GDP growth came in at 5.7 per cent year on year, while August’s industrial production was up 13.1 per cent over the same period.
Tom Elliott, global strategist at JPMorgan Fleming Asset Management
