Mini-bubble in Latin assets

With the major industrialized economies settled in a low interest rate environment in recent years, huge investment flows had poured into Latin America as portfolio managers accepted the inherent risks and chased the region’s high yields.

“In 2005, net inflows to emerging market equity funds totaled $20.3 billion globally,” notes Clyde Wardle, emerging market currency strategist at HSBC. “During the first nine weeks of 2006, that number was exceeded. There has been a ridiculous amount of money going into these funds that was producing a mini bubble. When the S&P, FTSE, and the Nikkei started collapsing in mid-May, global money managers started battening down their hatches.” Nonetheless, Wardle believes the recent downturn is a temporary interruption, not an end, to the area’s good fortune. “We basically think this is a technical correction in the market — an unwinding of risk, rather than a change in fundamentals,” he says.

Rafael de la Fuente, chief Latin American economist at BNP Paribas, agrees, calling the May-June sell off a healthy process.

“Many emerging market assets had gotten too expensive,” he says. “Latin America is well-positioned to ride this out.”