Globally, most emerging markets stocks and bonds performed well in January. Investors regained their appetite for risk. This was thanks in part to the last-minute deal between President Barack Obama’s administration and the Republican leadership in the US Congress over the ‘fiscal cliff’. It was also partly due to the announcement of a new and very aggressive easing in fiscal and monetary policy in Japan. Meanwhile, economic data suggested that the worst of the recession in the euro area is past.
Latin American financial markets benefited from the improvement in investor risk appetite. In US dollar terms, MSCI’s Latin America index gained by 3.7% during January. Virtually all the currencies that have been trending upwards in the last quarter or so have continued to appreciate.
In the Regional Policy Review and Regional Economic Review sections, we explain how much of the latest news flow from the region has been positive. With some important exceptions, investors have responded favourably to one or more of the following: orthodox and neo-liberal policies; benefits from export commodity prices that are, in real terms, elevated; improving domestic demand and; a relatively benign inflationary environment.
Across the region, currencies have been appreciating against the US dollar in six countries – Mexico, Colombia, Peru, Chile, Uruguay and Paraguay. The softness of the Argentine peso and the Brazilian real (notwithstanding that the latter firmed in January) stand out in contrast. This has happened at a time that bond spreads – useful measures of risk premia – have been contracting across the region. Performance from most of the larger regional stock markets in Latin America has been pedestrian.
The most important message from regional financial markets is that investors are not convinced about the economic story in Brazil and have been discomfited by the lack of consistency in the authorities’ policies vis-à-vis the Real over recent months. The comments of those Brazilian companies included in the Latin Century – and others – in relation to operating conditions in the current reporting season will be instructive. Investors in Venezuela have responded favourably to the possibility of a change in government. Strained discussions between Argentina’s government and its creditors have had a predictable impact on bond prices. In the smaller countries, highlights include the widening of bond spreads in Jamaica over the last year, and the compression of spreads in the Dominican Republic.
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