Southern Exposure: The Rise of Latin America’s Markets

Twelve months ago, Latin America’s major stock markets were poised for growth. Brazil’s economy, the region’s largest, had grown at a staggering rate of 6.9 percent in 2010, and the Brazilian government projected continued growth at an average rate of 4.9 percent yearly through 2015. With fiscal discipline and robust copper and agricultural exports, Chile saw its stock market close up 41 percent in 2010. Even in Mexico and Colombia, two nations plagued by ongoing security problems, economic performance inspired confidence in foreign investors.

Yet, despite such promising indicators, Latin America’s markets actually declined over the course of 2011. As financial turmoil in the Eurozone cast an ever-darker shadow over the global economy, investors with an appetite for Latin American risk grew cautious. By the end of the year, Brazil’s benchmark BOVESPA index was down 18 percent; the Mexican Stock Exchange Index (IPC) had declined by 3.8 percent; Chile’s General Stock Price Index (IGPA) – considered by analysts a particularly strong bet – declined roughly 14 percent. Bolsa de Valores de Colombia (BVC) ended the year almost 20 percent lower than it began. Despite their considerable promise, Latin America’s markets withered as European disarray grew.

Yet, in 2012, promise remains and is, perhaps, stronger than ever. The forces driving growth in some Latin American economies will continue unabated for the foreseeable future, say market watchers. As Raul A. Garcia, an associate principal with Kaufman Rossin, a Florida-based accounting firm, recently wrote, “The investment potential in Latin America has been intriguing for several years because of the possibility of significant growth, but so far it hasn’t played out. This time around it appears that the fundamentals are in place for the region to become a true force in the global economy.”

“While some of the political and social challenges that have dogged Latin American economies are still there, there has been a tremendous amount of progress over the last decade,” says Garcia, expanding on his bullish view of Latin America and its growing stock and derivatives markets. “Fiscal austerity measures and China’s thirst for Latin America’s natural resources seem to have kick-started an economic boom. More and more foreign investors are recognizing this, which has really given some markets a boost.”

According to a recent TABB Group report, Latin America Electronic Trading: Caliente!, foreign investors are buying into Latin American markets – particularly Brazil’s – in a big way. Foreign investors are responsible for roughly 26 percent of equities volume, and hold 54 percent of market value. Likewise, derivatives markets – particularly in Brazil – are growing in global prestige as investors trade interest rate and currency futures as well as  single-stock options.

Follow the money

Markets throughout Latin America are experiencing growth to varying degrees. However, foreign investors have identified market opportunities in the following four nations as promising:

Brazil – The largest equity exchange in Latin America and the sixth largest derivatives exchange in the world, BM&FBOVESPA is dramatically erasing 2011’s losses. Through the first few weeks of 2012, BM&FBOVESPA has gained roughly 15 percent in value and is poised to maintain this trajectory throughout the year. The growth is aided substantially by its partnership with CME Group, which includes bilateral order routing, connectivity to the Globex network, and the creation of the CME Group and BM&FBOVESPA PUMA Trading System, the new multi-asset trading platform it launched in August 2011. The new platform is already trading BM&FBOVESPA derivatives, and will eventually expand to include equities, bonds, and other securities markets. The gains this year reflect a general bullishness about the Brazilian economic juggernaut, which is expected to continue unabated as the Brazilian government spends heavily on infrastructure.

Mexico – The Bolsa Mexicana de Valores is the second largest equity exchange in Latin America but, as TABB Group reports, a distant second, with only a 1/10 the trading volume of the Brazilian exchange. Perhaps more importantly, though, Mexico’s nascent derivatives exchange, MexDer, is enjoying increased trading volume, driven primarily by its order routing agreement with CME Group, which links its electronic trading platform with CME Globex.

Chile – The Bolsa de Comercio de Santiago is relatively small, but ranks as the third largest exchange in Latin America, reports TABB Group. Expect trading volumes in equities and derivatives to grow in the near future, says Garcia. “In Latin America, Chile is a model of fiscal discipline. It has impressive cash reserves, and outperforms the United States in growth.” Barring a collapse in copper prices, Chilean equities should see continued growth throughout the year.

Colombia – BVC handles a small volume of trades, but still ranks the fourth largest stock exchange in Latin America. BVC also launched a small derivatives exchange in 2009. Until recently, foreign investors avoided Colombia due to the country’s reputation for corruption and drug-trade violence. For the first time in decades, says Garcia, investors are now returning to resource-rich Colombia – and to its economy. “The government has made providing security for foreign investors a priority,” he notes.“Consequently, foreign direct investment has increased, and the country’s middle class has grown by 40 percent.”

All the major Latin American indexes were in positive territory in early 2012, an encouraging sign. Yet, says Garcia, foreign investors are taking a “wait and see” approach to events in the euro-zone. Also, Brazil, Mexico, Chile and Colombia are still in the process of creating strong regulatory bodies to oversee their stock and derivatives exchanges, which could give some investors pause.

“These are relatively young markets,” says Garcia. “They are making advances forward, but there is still some ‘buyer beware’ risk, particularly in the smaller exchanges. But the more you see these countries develop strong regulatory bodies to oversee their markets, the more you will see international investors buying in. The economic growth is there, and will continue. In 2012, investors will see this growth reflected in market performance.”

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