Latin America’s Boom-Year Promises Unravel in Stock-Market Bust

Major Protests Against The Government Planned Across Brazil

Demonstrators dressed in the colors of the Workers' Party next to smoke from a flare during a protest in Sao Paulo, Brazil, on Aug. 16, 2015.

Photographer: Patricia Monteiro /Bloomberg
  • Region's market value sinks by $800 billion since 2010
  • Commodity plunge and corruption scandals spur investor concern

Latin American stock markets are shriveling.

Corruption scandals from Brazil to Mexico, a collapse in commodities and a plunge in Latin American currencies have wiped out $800 billion in market value since 2010 -- equivalent to the economy of Turkey. The region now accounts for just 2.1 percent of global market capitalization, down from 5 percent five years ago. Shares traded in the U.S. and China make up 47 percent of the total, up from 36 percent.

“If you had asked me five years ago, I’d have been very optimistic about places like Brazil and Chile,” said Geoffrey Pazzanese, a money manager who helps oversee $450 million in assets at Federated Investors Inc. in New York. “To call it disappointing is to put it mildly.”

Federated’s $214 million InterContinental Fund, which invests in global equities traded outside the U.S., held 25 percent of its assets in Latin America in 2010. Today, it holds none. Other money managers adopted similar strategies, including the $34 billion Oppenheimer Developing Markets Fund, which cut its holdings to the region to 17 percent from 28 percent. Its share in Asia Pacific rose to 38 percent from 31 percent, according to data compiled by Bloomberg.

Weaker equity markets make it harder for companies to raise cash to fund their businesses in the region, said Stacy Steimel, a money manager at Pinebridge Investments in Santiago, who oversees about $200 million in Latin American stocks. With gross domestic product forecast to remain stagnant in 2015, deteriorating markets further weigh on economic activity.

In Brazil, Latin America’s largest economy, a sweeping graft scandal engulfing state-run oil giant Petroleo Brasileiro SA and the country’s biggest builders has pushed the nation toward its deepest recession in a quarter-century and left President Dilma Rousseff fighting for her political survival. Petrobras has tumbled 66 percent in the past five years, while telecommunications provider Oi SA and steelmaker Cia. Siderurgica Nacional SA are both down more than 85 percent.

Annual GDP Change (%)
Annual GDP Change (%)

It’s not much better elsewhere on the continent. The world’s highest inflation rate has left Venezuela struggling with shortages of food and medicine, Argentina is battling with hold-out creditors following last year’s default, and Mexico is trying to revive growth after its first attempt to sell licenses for oil drilling failed to attract major oil producers. Chile and Peru, which are among the biggest producers of copper and zinc, have seen export revenue tumble as prices for the metals have fallen.

While losses such as the 30 percent decline in Brazil’s benchmark index since 2010 and the 7.8 percent slide in Colombia’s Colcap are painful for local traders, they’re even worse in dollar terms. They translate to 65 percent for the real and 37 percent for the peso in U.S. currency. The MSCI’s Latin American equity index is down 48 percent for the period, while its gauge for global stocks has rallied 40 percent.

Although the overall picture for the region may seem daunting, some stocks are trading at attractive levels for long-term investors, said Adam Kutas, a money manager at Fidelity Management & Research Co.

“You see a lot of more defensive companies hanging in there quite well in terms of earnings,” Kutas, who oversees about $600 million in Latin American equities, said from London. “Some of the Mexican homebuilders are quite cheap and coming out of the deep, and also Brazilian auto-parts and industrial companies that have gone through a very deep downturn.”

Trading has fallen in all major Latin American markets. In Brazil, volumes have averaged $2.2 billion a day this year, down 44 percent from a peak of $3.9 billion in 2011, exchange data show. They are down 57 percent in Chile, 48 percent in Peru, and 34 percent in Colombia since 2011 as well.

“Latin America is very dynamic and has a lot of potential in the long run,” Pazzanese said. But right now, “there’s a pretty negative outlook,” he said.

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