Investors shrug off bad news, focus on short-term returns

North and South American equity markets soared last week, despite concerns over inflation, Japan, US interest rates and capital controls

Investors shrugged off bad news, pushing US and Brazilian equity markets up this week.

Equity markets steamrolled over events including the Portuguese government crisis, continued uncertainties over Japan and inflation data. But debt investors betray uncertainty about the future – with US interest rates, inflation and capital controls high on their list.

LatAm investors are taking the bad news in their stride. According to data from global fund tracker EPFR, there has been a leveling off of outflows from Latin America although Asia has been more hard hit by the news from Japan.

From Thursday of last week to Wednesday evening, there was $250 million in net equity outflows from Latin America, of which $139 million was from Brazil (1% of total assets), and $50 million from Chile (4.3% of total assets).

A big remaining worry for emerging markets portfolio investors is possible government intervention to cool markets, on the back of strong inflows thanks to foreign direct investment.

Rick Waugh, CEO and President at Scotiabank, told Emerging Markets: “Continued inflows are challenging for countries and could force governments to take actions that are inappropriate.” That could include moves on foreign exchange and further capital controls, and tariffs to protect home markets.

David Rolley, co-head of global fixed income at Loomis Sayles in Boston with some $30 billion under management, said the Portuguese crisis is not having a direct impact on his investments and believes Europeans will not allow a member to default. Latin America is far more oriented to China: “If China has a good year, so will LatAm markets,” he said.

Luz Padilla, fund manager of the DoubleLine Emerging Markets Fixed-Income fund, who runs some $400 million in emerging markets fixed-income investment, is concerned about how the Euro debt situation will play out in the long-term, but does not see the collapse of the government as a definitive moment. “We’ve been concerned for more than a year over Europe.” Risk is priced in, she noted, adding that in recent months “markets have been extremely resilient.”

Tom Cooper, co-head of global fixed-income at GMO Boston, with $2 billion in Latin investments, said he was surprised that market reaction to Portugal has been so sanguine.

“I don’t know why it’s had no impact. It seems an important negative but it does not seem to have had any effect on investors.” He believes that it will affect fund flows in the future, though.

Even so, Cooper continues to invest in all the major markets in Latin America and is overweight on Argentina. When asked about alleged under-reporting of inflation, he replied: “They have been lying about that for five years. There is a lack of confidence in Argentine institutions, but it’s a minor issue for corporate bond investors.”

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