Latin Finance - January/February 2011 - 15

local currency investment

September total benchmarked to local currency, up from $36 billion at the start of 2009.

included strengthening currencies against a weak dollar. “What’s driving it is the debasement of dollars,” says Gutiérrez, referring to Positive Shock commitments to local currency. He adds LatAm governments have tended to that this has been the trend over the last treat new inflows like the disruptive hot few years, gaining pace in the aftermath of money of the past. Brazil hiked the IOF the Lehman crisis. withholding tax to 6% from 2% in 2010, Fiscal balances of a group of leading and while this did little to stem currency developed nations deteriorated by 6.2 appreciation or the flow, other countries percentage points of GDP between 2007 were expected to do something similar. and 2010, while net debt skyrocketed “They must get used to the fact that a almost 20.0 percentage points of GDP, lot of these flows, which used to be highly according to JPMorgan. During this time, transitory in the past, today are much EM contributed more to global GDP more permanent,” says Mandeng. “These growth than all developed markets. EM countries are facing a permanent positive countries account for just 33% of global capital shock,” adds the investor, whose GDP, the bank says, but their growth has fund has been a longstanding advocate of averaged 5.1% per year in 2007-2009, local currency investment. while developed markets contracted 0.2% Such barriers create a conundrum over the same period. for investors. “If enough controls are EM foreign exchange reserves, at $5.6 introduced, it could indeed become more trillion as of October 1, have increased expensive, but also inappropriate for eight-fold over the past decade and are now some investors, such as those who won’t nearly double the level of foreign exchange consider investments with a withholding reserves of advanced economies, at $3.2 tax,” says Jeremy Brewin, portfolio trillion, according to JPMorgan. manager at Aviva Investors, which has “A lot of people who are holding dollars about $1.6 billion in EM debt. want to diversify away from dollars. “Those EM countries that are less This demand we see globally, even from aggressive in controlling capital inflows pensions in the US,” Gutiérrez explains. He – like Mexico and Chile for instance – says this is for both state and private funds, are going to face even more inflows as who must source yield as a great many are investors seek to take advantage of the underfunded. trends,” says James Barrineau, co-head of Local plays even make up a sovereign investing at ICE Canyon, which significant portion of investment funds manages more than $2 billion in EM debt. not concentrated in EM. Global bond “So we may see more appreciation in those powerhouse Pimco has about two-thirds of currencies than we do in currencies like the EM exposure in its $80 billion in nonthe real,” he adds. EM dedicated funds in local instruments and one-third in external debt hard Dollar Debasement currency, according to Guillermo Osses, Global investors are en masse waking up EM portfolio manager at Pimco, which has to the fact that many LatAm governments $120 billion total under management. have made consistent improvement. This This total was 5% local in 2003 and includes enhanced productivity, inflation 50% in 2007. Osses declines to speculate controls, and promotion of overall stability on where this proportion might be that is thrown into sharp relief by the headed in the next few years, noting that vicissitudes of the US and European there is no target, and Pimco responds markets. to opportunities in both local and hard Sharp growth and interest rate currency. Osses adds that 40% of EM disparity between the so-called developed dedicated strategies are benchmarked and emerging worlds fuels the flow. Up against local currency or local bond indices. until late November, when some LatAm “Even in our external debt strategy, monies started to crumble, this also we use EM local currency a lot, to help

January/February 2011

LatinFinance 15

Latin Finance - January/February 2011

Table of Contents for the Digital Edition of Latin Finance - January/February 2011