Latin America: A young market going places
The wall of new institutional pensions money is having its effect on Argentinian equity prices, which have moved up smartly over the last year and show every promise of continuing in this vein. The pensions revolution has brought an equity consciousness.
Four or five years ago, foreign money was the most important factor driving the market. But now the new local institutional money coming into market has overwhelmed this by a factor of two or three times and this looks set to continue.
With pension funds advertising their past year's market yields widely in order to attract pensions money - the marketplace has become very performance oriented. Pensions investors are being told they can achieve 20% and more on an annual basis.
A key question in all of this is where can the money go except into the domestic equity market.
Bonds no longer yield the 15% to 17% annually they once did. Having come down to the 9% range, the prospect of any serious further appreciation is not on. In fact should the rates come down to to say 7.5%, which is certainly possible, the effect will only be to cause a further burst of money to go into the equity markets.
The ability to use outside markets with pensions money is seriously curtailed, as only a limited proportion can be invested abroad.
The net result is that equities is the only available route and the money flows are all likely to go this way so there will continue to be a lot of pressure on the local market.
The economy is recovering from a deep recession. So from a fundamental point of view, the growth outlook for the economy is very favourable, with a 4.5% to 5% GDP rise predicted for this year.
A problem for investors, is the dominance of utility stocks, ac-counting for 70% of the traded market capitalisation. The question is whether these will have a greater or lesser elasticity than GDPgrowth, as buying equities with a mere 3%,5% or 7% annualised rate of growth, as such growth rates will not prove much of an attraction.
But on fundamental measures, the stock market is not yet expensive. In price-to-book terms, an average of 1.5 to 1.7 is not that high, nor is 13.5 to 16.5 for price earnings ratios, and it is less than 10 in price to cash flow. It is a young stock market with some way yet to go. And it is in a region where the outlook is good for equities overall.
Tom Deane is managing director finance department, Banco Fran-ces del Rio de la Plata, Buenos Aires