The growth of funded pension schemes in the Latin American territories following the Chilean example implies a flood of new money hitting the stock markets which could lead to overheating. Pension assets in the region are believed to be considerable but only a miniscule proportion of these are invested abroad, concerns over the stability of the domestic markets could be well founded as the bulk of Latin American assets remain Latin American risk.

Mexico should be excluded from these figures as, by law, Mexican pension funds cannot invest abroad. Of all the markets, Argentinian pension funds have tended to invest more internationally, although the difference is marginal, while Chile, Brazil and Colombia remain pretty closed economies. A typical Brazilian pension fund's allocation is 25% equities, 10% real estate, 55% fixed income, investment funds, deposits and government bonds, with the remainder split amongst other investments.

The Brazilian pensions market, which represents approximately $80bn in assets, returned more than 12% in real terms in 1997, reflecting favourable investment conditions. Following the Asian crisis, the market lost $10bn in reserves but it is now in recovery, with more pensions money being ploughed back in, and reserves reaching $50bn.This recovery, however has been largely due to an influx of foreign investors fleeing the Asian markets. This, says Luiz Roberta Gouvea at Towers Perrin in Rio de Janeiro, does not bode well.

What is hitting our market here is not the pension funds really - it is the foreign investments. That is the real heat for the market." Brazil is experiencing a wave of privatisations in electricity, utilities and telecoms, which is also encouraging foreign investors to pump in more assets. With the majority of local pensions assets domestically invested, combined with an influx of foreign investment, there remains the question of how long the Latin American markets can sustain such heavy flows of money and even whether there are enough vehicles available.

Excess capital locally means a fall in interest rates, bad news for the funds whose majority investments are fixed income. Funds will need to seek out alternative investments to find better returns, be it investing abroad or diversifying locally into different asset classes. Ricardo Zabala at Citibank in Buenos Aires does not see this as a problem. "New investment alternatives appear when you start having a source of long-term income," he says, using mortgage bonds as an example. "Before you had these pension fund companies, you didn't have a very significant mortgage bond industry. When these funds appear, then long-term paper starts appearing and mortgage bonds are one of those papers and you have a huge market, a deep market that didn't exist before."

Supply and demand therefore would seem to be more the case for the Latin American markets as opposed to a situation where funds have assets to invest with nowhere to invest them. "You can't have papers if there is no one there to buy them. If there is someone willing to buy them, the securities will appear," he says. From this perspective, the markets are becoming more sophisticated as a result of the wave of new investment instead of crumbling under the pressure. Vehicles which in a less liquid market may be deemed unattractive, are suddenly becoming viable in the short term. In Mexico, treasury bill returns have traditionally been low. But with the peso devalued, as the bills are linked to the dollar, investors can in a six-month period, says Zabala, "get the real return in dollar terms, plus the devaluation impact. So it turns out that the T-bills are a great alternative."

Foreign investors as a result should also have sufficient investment opportunities, as a significant amount of infrastructure development needs to attract investment, not forgetting that the Latin American markets are undeveloped. In particular, the construction, cement and leasing industries need special attention. "I definitely don't think that the growth of pension funds will produce crowding out of foreign opportunities, of foreign investors," says Zabala. "These are countries which still need a lot of investment. They've grown in terms of production capacity and export capacity but behind that you still have a huge backlog of infrastructure investment."

He adds: "This has to be a transitory situation. You cannot have excess capital in an undeveloped country, it has to be transitory. If there were really excess capital in the long term sense, it wouldn't be an undeveloped country - it would be Japan.""

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