Latin America: Surviving the Tequila hangover
Allocating assets committed to emerging markets among the Latin American economies is discussed by Mark Mobius
The Latin American markets have been the investment story of the last year or so. As of March 10, 1997 the Brazilian market was up 114% from the beginning of 1996. The Mexican market was up 37% over the same period and the Argentinean market rose 28%. All Latin American markets have benefitted in 1996 from the dissipation of the so-called 'Tequila-Effect' - the aftermath of the Mexico crisis in early 1995.
Also, many Latin American countries have now embraced macro-economic reform and liberalisation which is fuelling rapid growth in the economies of the region, gestating stock market gains. Brazil and Argentina in particular, have adopted reform programmes de-signed to curb the inflationary excesses of previous years. The prospects for long term stable growth in the region are now better than they have been for many, many years.
The market has risen strongly since the beginning of 1996 when the Argentinean economy started to recover from the recession in 1995. Argentina is expected to register economic growth of around 4% this year compared to a decline of 4% last year. However, the stock market was extremely volatile in 1996, reflecting underlying political concerns. In August, finance minister Domingo Cavallo resigned, causing turmoil in Argentina's capital markets. Cavallo was credited with a remarkable reversal in Argen-tina's economic fortunes, in particular in bringing inflation under control. However, his successor, Roque Fernandez has been successful in building considerable credibility for himself in the international markets. With almost zero inflation, there could be considerable room to reflate the economy further and this could be very positive for the stock market in 1997. We currently hold about 6% of our total emerging markets portfolio in Argentina.
The Brazilian market has risen dramatically since the beginning of 1996 and is one of the major success stories of the year in the emerging markets. In part, this reflects the considerable success that the Real Plan has had in reducing inflation, which currently stands at around about 8% per annum. However, in order to maintain these levels the government has had to adopt a tight monetary policy and real interest rates have remained high at around 12% per annum. Growth in GDP in 1996 is estimated at 3% compared to 4% in 1995. About 9% of our total emerging markets portfolio is held in Brazil.
The Mexican market has also re-covered strongly underpinned by a recovery in output. Growth in GDP is estimated at around 5% in 1996 compared to a decline of 6% in 1995 brought about by the peso/ debt crisis. Inflation has fallen to around 30% per annum and is ex-pected to trend down. Mexico is now running a small fiscal surplus and the government has been able to pay all short term debt and tap international markets resulting in an improved debt maturity profile. The banking crisis seems to have been contained and there has been a slowdown in the growth of bad debt. All these factors point towards improving fundamentals for the stock market. About 7% of our total emerging markets portfolio is held in Mexico.
The economy is estimated to have grown at a healthy 3% in 1996, though this is down on last year's 6%. Inflation is steady at around 20% per annum. However, the current account deficit remains high at 5% of GDP and the government's borrowing requirement is estimated at 3% of GDP, though privatization proceeds are expected to cover much of this shortfall in government finances. Political concerns over President Ernesto Samper Pizano's campaign financing and an increase in guerrilla activity had a negative impact on the market in 1996. The long term outlook is for steady growth in GDP and equity prices in Columbia. We currently hold about 1% of our total emerging markets portfolio in Colombia.
Venezuela was among the star performers in the emerging markets in 1996 and it appears that the reforms initiated by President Caldera in April 1996 are beginning to pay off. The government devalued the Bolivar by over 70% in April and embarked on an ambitious programme to liberalise interest rates, prices and the exchange rate. Inflation has fallen steadily following a surge immediately following the devaluation of the exchange rates and could continue to fall. The exchange rate has remained remarkably stable since the devaluation. Despite lower inflation rates the real interest rate remains negative and the stock market has been soaking up much of the excess liquidity generated, fueling rapid share price gains. However, economic stability has not yet been achieved. GDP is estimated to have fallen by 2% in 1996, though a sharp recovery to 4% growth is expected in 1997. We currently hold about 2% of our total emerging markets portfolio in Venezuela.
Mark Mobius is president of Templeton Emerging Markets Fund