Latin Finance - January/February 2011 - 23

local currency investment

market thought the peso was cheap. “For a new issuer it seemed complicated, but an asset class that investors like, and they see we are the pioneers for our model in Mexico.” Chedraui says Mexican offshore accounts bought 40% of the trade, underscoring the emergence of a strong domestic bid for global local-currency. Global-local would also appear to be the format of choice for investors in corporate debt, with the region’s onshore private bond markets generally illiquid and offering mostly short maturities from a small group of issuers. International investors are also hesitant to take default risk where recourse is to local courts. “It’s probably the next evolution,” says David Oliver, portfolio manager at Stone Harbor, speaking of onshore corporate debt. “But there is still some jurisdiction question of how to deal with defaults in those markets.” Stone Harbor manages $7 billion in EM local currency assets. There is about $450 billion equivalent in EM local corporate bonds outstanding,

says Oliver, but over half is in China. LatAm corporate issuers also prefer dollars, particularly in the low-rate environment of the last 12 months, as well as for size and tenor.

Unprecedented Visibility

The history of EM investment is checkered with “paradigm shifts” that have preceded steep market sell offs. However, there is a growing conviction that EM is firmer than ever, visibility is unprecedented and local markets are the way to go. Skeptics see an exodus from local currency once G3 rates pop back up and the dollar firms. The big test for the asset class will be when – and for most it is a question of when, not if – this turnaround happens, or there is a global event that alters risk aversion. Inflation is a shortterm concern that can be tricky to balance against the long-term positive outlook, says Barrineau. “Every period of [EM] euphoria has been driven by a feeling that these

markets are making quantum leaps,” says Barrineau. “What’s different now is EM prospects relative to developed markets have never been this defined.” “These relative prospects are going to stay with us over many many years,” Barrineau says. “There will be periods of overextensions, but this will be a structural trend.” The long term bet investors make on the newfound and rigorously-tested stability of Brazil must be weighed against the threat of capital controls and the chance that monetary policy in the US or in the local markets change. A global event that dramatically alters the risk landscape is also to be kept in mind, particularly with talk of new European bailouts at the end of 2010. Whether structural changes that bullish investors highlight are enough to withstand this remains to be seen, but given the unprecedented amount of money being bet, confidence has never been higher. LF

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January/February 2011

LatinFinance 23

Paulo ClimaChauska

Administrative Law and Concessions Competition and International Trade Corporate Corporate Ethics and Compliance Employment, Labor and Pension Law Environmental Law Finance and Capital Markets Intellectual Property Litigation and Conflict Resolution Real Estate Recovery of Distressed Businesses Tax
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Latin Finance - January/February 2011

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