The rebound in Latin assets last week was a bear market rally,
rather than a spirited resurgence for emerging market risk,
analysts and investors have said.
Over the past two weeks, investors have reacted favourably to
the latest US initiatives to jumpstart capital markets. But
analysts say plummeting regional growth and the ongoing
disruption in G7 markets may further erode Latin asset prices.
The MSCI stock market index for Latin America dropped 2.65% on
Friday, capping gains for the week at 3%. Nevertheless,
regional equities have gained 14% over the past month.
Latin America has been emboldened on the face of it, by
the tentative shifts in global risk perceptions, said
Paul Bisko, senior emerging markets analyst at RBC Capital
Markets. However, this sharp rally in tandem with global
stock markets raises the risk that prices may fall as
investors rush to take profits.
Despite the improvement in global risk appetite, the Mexican
peso weakened 1%, the Brazilian real 0.4% and Colombia peso 3%
to the dollar this week. Emerging sovereign bond spreads in JP
Morgans EMBI index tightened to 620 basis points (bp)
a 2009 low with Latin spreads compressing by 15 bp.
However, this modest compression in bonds indicates
investor aversion towards emerging market assets while Latin
America is being dragged by negative economic prospects,
He argued market technicals, rather than strengthened appetite
for credit risk, have allowed bond spreads to tighten. He cited
declining redemption requests from emerging market debt funds
and a modest reduction in short exposure to Latin fixed-income
securities into longer-dated risk.
Blaise Antin, head of research for the $1.9 billion TCW
Emerging Market Fixed Income Fund in Los Angeles, fears markets
may have prematurely priced in a successful resolution of the
US banking crisis.
People have probably got way ahead of themselves this
week. We have to be concerned about what is happening to the
real economy in the US.
The weakness of regional currencies, low oil prices and the
prospect of a regional recession will detain Latin America in
bear market territory unless a massive upswing in G7 markets is
achieved at the forthcoming G20 summit in London, analysts
Nevertheless, Latin Americas lower leverage and stronger
liquidity position than other emerging regions, combined with
the positive effects of monetary easing and international
efforts to boost dollar liquidity, will soften the blow of