After three years of good performance, 2006 looks set to be another strong year for Latin American equity markets.
That's the view of Merrill Lynch Investment Managers (MLIM) with the company identifying greater political and macroeconomic stability and strong commodity prices coupled with equity-market valuations below historic levels as the key factors in create a compelling investment climate for the region.
MLIM believes that the combination of political stability with a regional twin surplus (current account and trade) have caused risk parameters to fall, all of which has not been fully priced in by Latin American equities.
In the past, forthcoming elections such as those in Brazil and Mexico, would have driven investors away from Latin America. This has not been the case so far in 2006. Brazil's President Lula has steered the country's economy on track and the country is on course to achieve investment grade status as early as 2008. If the main opposition party is elected to power the economy is likely to be prioritized higher up the policy agenda, benefiting fiscal and economic conditions.
Despite some disappointments regarding President Fox's reform agenda in Mexico during the past five years, the Mexican economy has performed well. Strong oil revenues and effective fiscal and economic policies have driven this growth. Given Mexico's strong financial positions, the chances that any of the three candidates running for office on 2 July 2006 would significantly change Mexico's current political and economic policies are fairly low.
2006 has seen a continued inflow of foreign money into Latin America amid the expectation that elections will not impact markets. Brazil in particular stands out with its attractive valuation and improving economy, with the added bonus that the Brazilian Central Bank is bringing domestic interest rates lower given low inflation expectations.
In global terms Latin America's exposure to commodities markets is proving valuable with demand for raw materials from India and China continuing to increase. The combination of a weak dollar and high commodity prices bodes well for most economies in the region, particularly when allied with robust domestic economic management and improving control of inflation.
'Of the Emerging markets, Latin America is currently one of the most attractive,' says Will Landers, Fund Manager of the MLIIF Latin American Fund. 'We expect the region as a whole to post high economic growth rates this year, despite expectations of a slowing global economy. The region's investment fundamentals have rarely been this good. We expect Latin America to continue to re-rate relative to other emerging markets - whilst also anticipating that emerging markets generally will gradually reduce their discount to their developed counterparts.'
The MLIIF Latin American Fund invests in a diversified portfolio of Latin American companies. It has returned 382.2% during the last three years (to 28 February 2006). Since launch and over the past five years the fund also ranks first quartile (to 28 February 2006)
Background notes: Merrill Lynch is one of the world's leading wealth management, capital markets and advisory companies with offices in 36 countries and territories and total client assets of approximately USD 1.8 trillion. As an investment bank, it is a leading global trader and underwriter of securities and derivatives across a broad range of asset classes and serves as a strategic advisor to corporations, governments, institutions, and individuals worldwide. Through Merrill Lynch Investment Managers, the company is one of the world's largest managers of financial assets. Firmwide, assets under management total USD 544 billion as at 31st December 2005.