This year, we expect Latin America's economic performance to remain strong, with 3.7% growth. Moreover, valuations remain attractive. The market is trading at 13.1 times prospective earnings. We have cited capital flows as the biggest imponderable, but are delighted to highlight increasing evidence that flows are beginning to return to Latin America. Brazilian equity market performance will probably be a significant beneficiary of returning capital flows. We now expect this dynamic to affect positively other attractive Latin American countries.
Volatility should diminish in the Asian financial markets. The financial crisis is quickly evaporating but the macroeconomic consequences still could be severe. Many economists and governments are still lowering their 1998 growth estimates. Weak demand from Asia, coupled with excess capacity, will keep commodity prices relatively depressed. Nonetheless, Asian financial markets are beginning to stabilise and become increasingly differentiated.
Also underpinning our brighter outlook for Latin American investment is Europe. A lot of momentum is behind demand in Germany, and there are no inflationary pressures. The benign view toward interest rates will continue to encourage flows into the emerging markets.
The US is performing well. We are sticking with the Fed view that interest rates will remain stable, with a longer-term bias toward an ease. In our opinion, the Fed is awaiting further evidence that activity will conclusively fall below trend. Fears that it will tighten are diminishing, as falling inflation boosts real yields. Flat rates further support investors boldly re-entering emerging markets.
We raised our short-term views on Brazil and Venezuela to positive from stable to reflect diminishing Asian volatility; Brazil's emergence from the threat of crisis as evinced by capital flows, and the oil price boost, which benefits Mexico and Venezuela.
We recently boosted our 12-month SI portfolio allocation for Brazil to 44.5% from 43.5% and relative to a neutral allocation of 43%. We cut our recommended asset allocation for Mexico from 32.5% to 30.5% on the view that fundamentals have improved more dramatically elsewhere in the region.
Juan Carlos Garcia is managing director, global head of emerging markets equity research, and Lawrence Goodman is managing director, global head of economics research and chief economist at Santander in New York