Federal Reserve

is putting fear into Latin American markets.

That, of course, should be no surprise. Rising interest rates could slow the U.S. economy, on which Latin American companies -- and the region's recoveries -- are dependent.

Already that fear has hurt Latin American equity and bond markets, erasing hopes that they might be shaking off the disasters of 1998.


( TBH), Brazil's dominant telecommunications provider, is 16 points off its May high, and

Perez Companc

( CNPZY), the second-largest oil company in Argentina, is 2 points off its May high.

Why does the



Higher U.S. interest rates are the bogeyman of Latin American equity and bond markets. The Fed's 1994-95 tightening program was one factor that increased pressure on Mexico's ability to borrow externally, eventually leading to the devaluation of the peso in December 1994 and a severe contraction of the economy in 1995. Another Fed tightening program could cause similar, if not as extensive, damage to Latin America.

An increase in U.S. interest rates directly impacts Latin American markets by increasing costs of funds. Higher U.S. interest rates make Treasuries look like a better bet than high-yielding -- and riskier -- Latin American debt. The result of higher U.S. Treasury yields will be a reallocation of capital away from emerging markets and into less risky issues.

U.S. interest rates also affect Latin American markets indirectly through the impact of U.S. stock market volatility. Historically, there has been a strong correlation between the

S&P 500

and both Latin American equity and debt. The U.S. remains a major destination for both raw materials and intermediate goods exported from the region, making Latin America's economies dependent on the health of the U.S. economy. Any indication the U.S. economy may be slowing will negatively impact Latin American growth prospects. In short, if U.S. equities fall, so will Latin American markets, despite positive fundamentals. The correlation is just too strong.

All Is Not Lost

A U.S. rate rise will initially hurt prices of Brazilian, Argentine and other Latin American stocks and bonds. Traditional issuers, like the Brazilian government (which sells capitalization bonds under the Brady scheme), Brazil's Telebras and Argentine oil companies


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and Perez Companc, will be hurt because they are the most visible Latin American corporations. That they have ADRs traded on the

New York Stock Exchange

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only tempts international investors to sell, fueling the downturn. However, that doesn't mean there won't be opportunities in the aftermath of a rate increase.

In fact, the recent Fed fright has created bargains that investors are using to go long their favorite companies and sovereign debt issues. With yields from 12% to 17%, sovereign bonds, particularly Brady bonds, are enjoying renewed popularity. Equity players will return to scout around for the high-growth companies or those the government may privatize by selling controlling interests.

Telecommunications companies are among the most likely to benefit because the market is on the verge of takeoff. Remember what the U.S. market looked like just after the breakup of


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in the early 1980s? That's where Latin America is now. While real competition hasn't emerged yet, it will in the next couple of years, ushering in a telecommunications revolution with it. Per-minute charges will likely fall, fixed-line and cellular penetration will dramatically increase and the market for value-added services will expand rapidly. It is no coincidence that among last month's hot IPOs were a handful of Latin American Internet plays, like


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( PASA).

Brazil, Argentina and Peru have all privatized their monopoly telecommunication companies and are allowing increased competition in their once-protected markets. Brazil's Telebras,

Telefonica del Peru

( TDP) and Argentina's two telecommunication companies,

Telecom Argentina

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Telefonica de Argentina

( TAR) are all on the forefront of this revolution and will be growth companies for the next few years.

Latin America is merely waiting out the Fed meeting. But remember this simple apothegm: The inverse of "what goes up must come down" is, of course, "what comes down will go up."

Scott Grimberg is the emerging-market fixed-income strategist for Miller Tabak Roberts Securities. At the time of publication, he held no positions in the instruments discussed in this column, although holdings can change at any time. The opinions expressed in this article are Grimberg's and do not necessarily reflect those of Miller Tabak Roberts Securities. While he cannot provide investment advice or recommendations, he invites you to comment on his column at