The Latin market rally took a breather this week, sparking
fears that rising US interest rates or lacklustre global growth
will spread regional panic and cut back sky-high stock and bond
Ramin Toloui, executive vice-president of Pimco, told
Emerging Markets: There is a real danger that
the market has positioned itself for a more favourable US
economic growth scenario than will materialize.
Bertrand Delgado, Latin America analyst at Roubini Global
Economics, said: There has been over-exuberance combined
with large amounts of liquidity that is going somewhat beyond
the regions economic fundamentals.
Financial markets last week seesawed, driven by contrasting
sentiment on China and US exit strategy from stimulus policies,
US growth and western sovereign debt.
US equities finished above their January high on Friday,
buoyed by the Federal Reserves declaration on Tuesday of
intent to keep interest rates at historic lows for a prolonged
period. But Latin markets after staging massive rallies
since last spring were largely unchanged.
The MSCI All Country World Index, the benchmark for global
equities, was up 0.9% and the JP Morgans Emerging Market
Bond Index Global tightened by 1 basis point (bp) to 269bps
over US Treasuries.
Sovereign bonds, from Argentina and Venezuela, saw risk
premiums decline the most, as investors chased yield. Latin
currencies underperformed emerging Europe, as the dollar
strengthened and central banks in the region intervened to curb
currency strength to boost exports.
The most notable sign of weaker risk appetite came in
Brazil, when a slew of firms last week postponed or downsized
initial public offerings. Investors are increasingly
concerned about high equity valuations, the fact the rally has
largely been driven by stimulus policies and fears that markets
may reprice global economic performance at a lower level,
Paul Bisko, senior emerging markets analyst at RBC Capital
The margin between developing world bonds and US government
bonds, seen as safe-haven assets, has narrowed dramatically
over the past year and now stands at pre-crisis levels.
Toloui of Pimco said: The risk/return profile of
emerging markets may look less attractive in the near-term due
to high valuations while markets are still assessing US
He added that investors, faced with relentless inflows
into emerging market bonds, are reluctantly snapping up
assets which, combined with record low US interest rates, could
in the medium term create bubbles in Latin debt markets.
Delgado at RGE said Latin assets may have room to rally if
capital flows maintain their frenzied pace once regional
central banks put up interest rates. However, if and when
the Federal Reserve hikes rates, there could be a horrible
correction in Latin America, he said, citing in
particular the overvaluation of the Brazilian