Latin Finance - July/August 2010 - 18

european buyside view

investor confidence. It also provides opportunity to snap up extra yield in countries, like Brazil, where there is less macro risk than in some developed markets.

A Greece Solution

The Europe crisis serves as a reminder that LatAm is not immune to external events. If LatAm is to take full advantage of opportunities for growth, global conditions will have to permit fundraising. Bhandari notes that EM recoveries of the last year are being driven by temporary factors like inventory rebuild and government spending. Brazil and Mexico are vulnerable to lower prices for oil and other commodities, she adds, noting also that they are headed for another correction. “The fact that the US accounts for 20% of Mexico’s GDP, is more of a weakness than a strength over the next two years,” Bhandari says. In order to start buying again, investors hope to see long-term solutions to the Europe crisis, not short-sighted relief that defers rather than solves liability problems. They also need to see inflows again to provide confidence that liquidity will be sustained. “[LatAm] fundamentals are fine and we’re still seeing inflows,” says Chan. “The only reason we are still not investing yet is we are afraid of potential reductions from investors. What we are looking for is continual inflow coming into our asset class for the next few months, I think that will increase our comfort level.” “We have seen a few outflows this year,” says Dhiren Shah, equity portfolio manager at BlackRock, which manages $13.1 billion in EM equity. “It hasn’t been dramatic, but we expect more in the market correction, which hasn’t fully materialized.” He adds that inflows should revive once risk perception eases.

Bütikofer, head of EM fixed-income at asset manager UBP, which manages $560 million in LatAm debt. Some, like Uruguay are meeting 2010 needs though local borrowing and multilateral funding. “We are opportunistic in tapping the international market, to maintain our global curve and obtain information on our pricing levels,” says Carlos Steneri, Uruguay’s director of public credit.

Mexico hopes to be able to tap euros by the end of 2010. A sterling bond offer and another yen issuance are also possibilities, he adds. Following euro-denominated deals from Votorantim and Vale this year, bankers are pitching clients to tap that market, but larger European-based investors doubt this will become a serious trend. “Liquidity is to be found only in the dollar market,” says Bütikofer. The euro market has opened and shut many times to LatAm. While it can offer diversification and better funding costs for some issuers, there is little value for investors with dollar alternatives, adds Bütikofer. “Sometimes the euro issuance can seem very compelling, but the problem is they are for a much smaller investor base, they will always remain expensive – you will not see spreads narrow such that the arbitrage disappears,” says Aberdeen’s Chan.

London Equity Calling?

Euro funding limited, says Bütikofer Meanwhile, Mexico has covered this year’s funding plan, though it will consider opportunistic issuance. “We are exploring new ways of issuance,” says Marco Oviedo, Mexican deputy director general of public credit. The government is planning a third domestic bond syndication, likely a September sale of five-year Mbonos, to follow the 25 billion pesos in 10-year notes and 10 billion pesos in 30-year Udi-denominated bonds sold in separate auctions this year. The large auctions designed to bring instant liquidity are a new feature, replacing the old system of multiple small sales.

Quality Debt Issuers Can Wait

As in 2008-2009, LatAm governments and their quasi-sovereign entities are mostly pre-funded and only looking to issue opportunistically. “If there is a prolonged period of time where uncertainty prevails, then only high-quality issuers will be able to access the market,” says Jean-Dominique

Euro Limitations

Euros may also become an option as Mexico – which issued in Japanese yen last year – seeks to further diversify its investor base. Oviedo says in early June that market conditions were not attractive, but

The London Stock Exchange (LSE) is meanwhile trying to lure LatAm equity issuers away from local bolsas and New York. Ideally, LSE would like LatAm UK IPOs to broaden beyond miners like Fresnillo and Hochschild Mining which have listed in the past. However the exchange suffered a blow in June when Brazilian miner Ferrous Resources pulled a $300-$400 million London IPO due to unfavorable market conditions. The Minas Gerais-based iron ore miner had expected to list by the end of June and eventually reach a 25% float. Ferrous will reevaluate when conditions improve. Even if others consider London, they would have to wait out market volatility and may well find the Bovespa more attractive. European investors are nonetheless optimistic, saying that Brazil oil services providers should headline the next wave of IPOs, once market volatility subsides. “The next round of IPOs in Brazil, you will see more related to the Petrobras food chain,” Chris Palmer, equity portfolio manager at Gartmore, with $2.5 billion under management in Latin equities, tells LatinFinance. LF

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July/August 2010

Latin Finance - July/August 2010

Table of Contents for the Digital Edition of Latin Finance - July/August 2010