Remember the Latin American crisis?
Brazil seemed to be on the verge of an economic meltdown. Economists were talking about global dominoes, worried Brazil could trigger a series of collapses in the region that would play into the larger emerging-market tide that had started in Asia.
This didn't seem like any place for a fund investor to be sticking around by the fall of 1998, let alone sinking new money into a turnaround story. Not a bad assessment, in retrospect. But the darkest moment arrived just months later, and Latin America funds have been producing huge gains since.
The turning point took place over several days in mid-January. Brazil bit the bullet and devalued on Jan. 13. Two days later, the government stopped intervening and let its currency, the real, float freely.
There is plenty of conversation about what exactly melted away, an economic crisis or the perception of a crisis. But no one can argue with the kind of stock returns posted in Brazil and the rest of Latin America so far, gains that have made Latin America funds one of the best-performing sectors.
The average Latin America fund gained 60% between the bottom on Jan. 14 and April 29, according to
. The absolute worst contender among the 56 Latin America funds tracked by Lipper,
Evergreen Latin America, gained 44.6% during the same period.
This is the kind of rising tide that will help everyone from best to worst make a short-term killing: Brazil's
stock index is up 124% since Jan. 14. The Mexican
index has gained 64% over the same period, and Buenos Aires'
index has advanced 66%.
12-Month Returns Still Lag
But the wild fund returns aren't quite so much fun when you look at the bigger picture. First, it was expensive to be early for Latin America's rally. The average Latin America fund lost 2% in the first two weeks of 1999. That's what drags the group's average year-to-date return down to a pleasant but much more sober 26%. Look at the same group over the last 12 months, and the average fund still has lost 23%.
Latin America managers at
Scudder Kemper Investments
spent much of their time last fall examining valuations for individual stocks that were taking a pounding as money drained out of Latin capital markets in the last months of 1998.
"In many cases, the devaluation was priced into the stocks in late November or early December," says Paul Rogers, co-manager of
Scudder Latin America, the largest Latin America fund, with $498 million under management on March 31. "When you look at cash flow on a devalued basis, the stocks were fantastically cheap at that time. Once the devaluation occurred, this became evident."
Ironically, the two best-performing fund entries in the Latin America category since the Jan. 14 bottom have little to do with Brazil and its back-from-the-grave recovery. Both tiny funds invest in Mexico.
Mexico remains the most important market for any Latin America mutual fund. Typically, most of the money is invested in Mexico, followed by Brazil and then Argentina. The rest is spread around in very small percentages in other Latin markets.
That kind of country allocation has been a big plus for U.S. investors this year. The Bolsa is up about 47% on a currency-adjusted basis, compared with the Bovespa's 66% gain that gets knocked down to about 20% when it is measured in dollars.
Rogers still credits Brazil's successful currency strategy for much of his fund's bounce, up 55.4% between Jan. 14 and April 29. But he also points to Mexico's performance throughout the Latin stock scare and recovery as an important longer-term plus for Latin America investors.
He says the Mexican stock market is becoming increasingly decoupled from the more volatile Latin countries and is being seen as a comparatively stable investment. "Even the Brazilian effect on Mexico was quite muted," says Rogers. "I think investors are beginning to differentiate and see Mexico on its own terms."
Why? Rogers sees the benefits of the
North American Free Trade Agreement
to Mexico continuing to seep deeper into the economy and create more stable consumer purchasing power. He also credits Mexico with a good job handling the price slump in oil and other commodities.
Commodity prices are one of the main reasons Rogers remains upbeat on Latin America. Latin economies and their stocks have traditionally performed well in stronger commodity cycles, particularly for oil but also pulp and paper. Early signs of better pricing, though hardly definite, are encouraging. "If you get a commodities pickup, we could see very strong performance in Brazil," says Rogers.
Another positive: the unsolicited $16 billion takeover offer last week by Spain's
, Argentina's leading energy company. The bid, which would be Latin America's largest takeover ever, could trigger a series of mergers and acquisitions that would benefit short-term stock prices.
Rogers thinks a YPF takeover and perhaps a few other deals could help the depth of Latin markets, presuming investments in those stocks are redistributed in other issues. Scudder Latin America, like many other Latin America funds, keeps a large portion of assets in a few very big names to assure liquidity. More than 57% of the Scudder fund was invested in its top 10 holdings on March 31.
But even a Latin optimist like Rogers can see potential problems. Brazil's recovery is far from complete, and a reversal could drag other countries with it. The domino theory is fading, but it's not dead yet.
And politics remains in the background, with election scheduled in Argentina this year and in Mexico in 2000. "That always creates volatility," says Rogers. Volatility is one of the few things to count on.
Steven Syre & Steve Bailey write for the Boston Globe. This column is exclusive to TheStreet.com. At time of publication, they held no positions in the stocks or funds discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy stocks or funds.