Merrill's Landers Likes Latin Stocks

What we have been seeing over the past few years is that with yields so low in the U.S., Japan and Asia, investors have moved to emerging markets like Latin America as a source for high yield with relatively low risk, given the improvements that we have seen on the macro level. Interest rates are still so far apart between the developed world and emerging markets -- especially in places like Brazil -- that I think we are oversold a bit here. But still, it's hard to find momentum right now.

A lot of the recent jumpiness has been attributed to the unwinding of the so-called carry trade by hedge funds and the possibility of another Long-Term Capital situation. How prevalent is the carry trade, and how much of a problem is it?

The carry trade means that people are borrowing at very low rates in the U.S. and buying Latin American bonds with much higher yields. If this was to unwind quickly, you could have some liquidity trouble. But the fact is that rates in Brazil are still going up -- the central bank in Brazil just raised rates -- and they are going to stay up for a while, at least through the third quarter. So there is no rush for investors to unwind that trade right now since they are still making a decent return on it.

Also, the Latin American countries affected by this trade -- Brazil, Mexico and Chile -- have reduced debt levels quite a bit, which limits the possibility of things getting out of hand.

Let's go through the players on a country-by-country basis. Mexico has been having some peso problems lately. What's going on there?

U.S. dollar weakness has been the real problem behind the Mexican peso's volatility. Over 80% of Mexican exports are directed toward the U.S. market, so when the dollar weakens, the Mexican peso is somewhat forced to weaken along with it in order for Mexican exports to continue to be competitive in the U.S. market.

Mexico has also lost a great deal of U.S. market share to countries like China. China has surpassed Mexico as America's No. 2 trading partner behind Canada. Of all the major currencies in Latin America, the Mexican peso is the one that has suffered the most in order to maintain its competitiveness. If you look at the Brazilian real or the Chilean peso, those currencies have strengthened against the dollar in the last year and a half. Even the Argentine peso strengthened against the U.S. dollar when Argentina was going through its debt-restructuring period.