![\"key_south_american_countries_current_accounts.jpg\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2014\/12\/key_south_american_countries_current_accounts.jpg\")
<\/p>\nGone is the dynamic growth that propelled Latam as one of the top performing
\nasset classes between 2010 and 2012. Just as western economies were
\nattempting to regain their footing, following the 2008 financial devastation,
\nSouth American economies were on a roll, handsomely benefitting from strong
\nAsian \u2013 particularly Chinese \u2013 demand for commodities and industrial raw
\nmaterials. Economic growth was further fuelled by record foreign inflows, in the
\nform of both direct investment and hot capital, driven particularly by carry trade
\nstrategies amidst a ZIRP* environment. <\/p>\n
Alas, Latam growth was excessively leveraged to the commodity \u201csupercycle\u201d,
\nneglecting diversification into productive areas and policies geared towards the
\nemergence of a middle class. Also, the ensuing credit expansion forced central
\nbanks to shift into restrictive mode as consumer prices began to overshoot
\ninflation targets. South American economies such as Brazil, Chile and Peru,
\ntraditionally the region\u2019s magnets for foreign capital, thus now find themselves in
\nthe midst of a dramatic slowdown, bordering on recession. Worst off of course, is
\nthe white elephant: Brazil. Dilma Rousseff\u2019s recent re-election despite her poor
\neconomic record \u2013 the country is undergoing severe stagflation with GDP down
\n1% and inflation at 6.75% \u2013 makes for low expectations.<\/p>\n
<\/p>\n
Recessions never play out well for social and political stability. South America is known for deceitful political promises of \u201cnew beginnings\u201d and frustrated voters taking to the streets to express their deception, loud and clear. Foreign investors will be unwilling to see their capital caught in situations where, when push comes to shove, politicians would rather side with public opinion. As such, it is no surprise that capital flows to emerging markets are already shunning South America in favour of Asia \u2013 exacerbating current account deterioration, currency depreciation and sovereign spread expansion across the Latam region.<\/p>\n
Remain underweight Latam vs. Asia\u2026 but not all is bad<\/p><\/blockquote>\n
While it is premature to call for a \u201cSambarazo\u201d (in reference to Mexico\u2019s 1994
\n\u201cTequilazo\u201d which reverberated throughout the continent), we are keeping a
\ncareful watch on Brazil et al \u2013 as well as our overall preference for Asia within
\nthe emerging space. <\/p>\nColombia and Mexico are notable exceptions to our cautious Latam stance,
\nfaring much better than their \u201ccamaradas\u201d. The former is, however, starting
\nto show signs of a sizzling real estate market and overheating credit growth.
\nAs has been the case in neighbouring countries, central bank obsession with
\ninflation targets may \u201cunintentionally\u201d pop a Colombian asset bubble. In Mexico, the story is one of structural reforms: to reduce dependency on oil revenues, taxes have been raised, in turn pressuring wage growth. Along with subsiding inflation, this means that the central bank can afford to remain easy. Robust US manufacturing is also helping, as a large part of Mexico\u2019s exports go north.<\/p>\nFinally, as regards Brazil, much of the bad news does now look priced in.
\nOpportunistic investors may thus find some selective high return \/ high risk
\ninvestments there, particularly in the fixed income space.
<\/a>\n\t\t\t<\/div><\/figure>\n\t\t<\/div>\n\n","protected":false},"excerpt":{"rendered":"