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Good News (Mostly) from Latin America
In his highly detailed keynote talk, Latin American specialist Jorge O. Mariscal hammered home a number of compelling points about future prospects for the region.
As a Brazilian educated in Mexico and New York, Mariscal is co-director of the Latin American Equity Research Group at Goldman Sachs and chief investment strategist for Latin America at the company. Accompanied by a presentation of forty-four slides depicting charts and graphs, Mariscal arrived at the following conclusions:
- Brazil and Mexico, as the two largest economies in the region, have made strong recoveries and are improving their macroeconomic fundamentals.
- Argentina is still a touchy subject: it is facing severe shocks and a political crisis. Risks there remain high.
- Short-term challenges for Latin America include a U.S. slowdown, domestic politics, and commodity pricesespecially oil.
- The long-term challenges include shrinking liquidity and new float-based benchmarking.
Anyone who looks at the key economic indicators for Latin America over the last decade, and compares them with what they were ten years ago, Mariscal said, has to admit that there's been "a world of change" in Latin America. Both qualitatively and quantitatively, the region looks quite different now, he said.
The greatest achievement has been in the control of inflation, he added. "If you talked with someone in Latin America in the 80s, the picture that we have today would have been unbelievable. You wouldn't have believed that Latin America by now would be experiencing inflation of under 10 percent."
For 2001 he predicted inflation of around 5 percent on average for the region.
Other welcome changes come in the form of currency, competitiveness, and risk perception, he said. Most of the currencies in Latin America are floating today; and there is more competitiveness, with exports as a percentage of GDP around 18.7 percent in the year 2000, compared to around 12 percent in 1992. (Take out Mexico, Mariscal said, and it's 13.7 percent for 2000 versus 11.3 percent for 1992.) The overall picture translates into improved perception of risk, he said.
Taking a cue from emerging markets
If you want to invest in risky emerging markets, you should not wait until the US economy turns around. ... You should be doing it now, in the middle of the cycle of monetary policy easing by the Fed | |
Jorge O. Mariscal |
"Every time the Fed has lowered [interest] rates, we have seen a rally in emerging markets for the last ten years. ... One of the conclusions that I would leave you with is that if you want to invest in risky emerging markets, you should not wait until the U.S. economy turns around. You should not wait until there are good positive indicators. You should be doing it now, in the middle of the cycle of monetary policy easing by the Fed."
Activity in emerging markets seems to be "very anticipatory" of developed markets, he suggested. His group, he said, charted returns in global emerging markets (GEMs) against OECD leading indicators, and "lo and behold, we found that for last nine years, emerging market returns tend to anticipate the inflation points in OECD leading indicators by about three to six months."
They also compared GEM returns against U.S. industrial production and found similarly intriguing results.
One hypothesis for this puzzling state of affairs, he said, is that emerging market companies and Latin American companies tend to be suppliers, and their profitability shows itself ahead of the profitability of companies in developed markets. The other hypothesis, he continued, is that emerging market portfolio managers tend to be a lot more sensitive to changes in the economic environment.
"Why? Because it is very difficult to sell emerging market stocks; they're very illiquid. So you have to be ahead of the game if you want to get out. Otherwise you can't get out when things get bad.
"Emerging markets have been defined as markets from which you cannot emerge in an emergency," Mariscal quipped.
Given that emerging markets seem to be anticipatory of what is going on in the developed world, he predicted that a U.S. recovery would take place soon. "We should be buying U.S. stocks," he advised the audience. "The emerging markets are telling you that a recovery is around the corner in three to five months."
Three giants fess up
Focusing his comments on three countries in particularBrazil, Argentina, and MexicoMariscal offered a mixed review for the program of newly reinstalled economy minister Domingo Cavallo of Argentina. While granting Cavallo high marks for his political skills, Mariscal offered a low score for his economic program.
"Unfortunately, the debt dynamics of the country are such that the current taxation trends suggest that debt as a percentage of GDP is going to continue to increase forever. So something has to happen. Taxation has to change or spending has to change."
Cavallo has "a little bit better than a fifty-fifty" chance of success, Mariscal predicted.
"What concerns me is that, yes, he is a great political operator, he has done a tremendous job bringing together the different factions in Argentinabut the program as he has outlined it so far [is], in my view ... very weak," he continued. The two broad themes put forth by Cavallo, he saidan increase in taxation, and declines in import tariffs for capital goods as well as increases in tariffs to consumer goods, sound good in principle. But, Marsical added, "It smells to me a lot like 1970s protectionism.
"He was given superpowers. ... These superpowers also came with some kryptonite. Part of the problem is that he is not allowed to lay off anyone in the government, and secondly he is not allowed to privatize any government enterprises. If part of the big problem in Argentina is a bloated government, it is unfortunate that he is not going to be able to touch the payroll of the government."
Brazil and Mexico, on the other hand, are in better shape, according to Mariscal. Brazil's recovery has been "nothing less than remarkable," he said. As for Mexico, he remarked, "The best convergence story in the world is between the U.S. and Mexico."
He expects the collaboration between President Vicente Fox of Mexico and President Bush, via the North American Free-Trade Agreement, to bring Mexico to a new level, thanks to an opening of the energy sector and further liberalization of the banking and financial sectors in Mexico.
"The Fox administration is a very interesting one, because it's capitalism with a human face," Mariscal commented.
"The bottom line is, Latin America faces more or less the same problem, whether you look at Argentina or Brazil. And Fox is the first--in my mind in history, the first experimentof someone who's got a very strong market orientation but at the same time some kind of social conscience.
"And if it works," he added on an optimistic note, "I think it's going to be emulated by political platforms in the rest of the region and in the years to come."
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