Merrill's Landers Likes Latin Stocks

Are rising U.S. interest rates finally putting an end to the three-year carnivale in Latin American stocks?

Until a few weeks ago, Latin American fund holders had been enjoying the investing equivalent of a massive street party. Their funds averaged greater than 20% returns for three straight years, according to Morningstar.

But climbing U.S. interest rates, along with investor concerns over the unwinding of the so-called carry trade, have rained on Latin America's parade over the past month. The region's funds have dropped 3.5% in that span.

Considering those same funds are still up over 3% year to date -- outperforming most domestic stock funds -- most Latin American fund managers say the good times will roll at least through 2005, though they are not expecting the 40% gains that were common last year. Will Landers, portfolio manager for the $200 million MDLTXMerrill Lynch Latin America fund, for one, expects Latin American stocks to return 15% to 20% for the year, on the basis of his belief that the region's equities remain undervalued despite the multiyear run-up. Landers' fund is up 5.3% for the year and has returned an average of 23.3% over three years.

In a conversation with TheStreet.com, Landers explains why rising rates -- and the carry trade -- won't sink Latin American stocks, as well as which countries will be partying the heartiest from here on in.

Latin American stocks have been falling sharply since the end of February. What's behind the volatility?

In my opinion, the volatility we have been seeing lately is not just specific to Latin America but to emerging markets overall. There has been a decline in risk appetite for global markets as the expectation that interest rates in the U.S. might start to move up a little faster than previously forecast.

Why do rising yields in the U.S. weigh so heavily on emerging markets?

I think it's a bit overblown right now, but historically emerging markets, both the countries and companies, have been tremendously overleveraged. That means that rising rates will really drive up the costs of their debt payments.