With 2015 drawing to a close, it is safe to say this has been another rough year for Latin America equities and the relevant exchange traded funds. For example, the iShares Latin American 40 ETF (NYSEArca: ILF) has tumbled 23.6%.
According to JPMorgan Asset management, Colombia and Mexico are now members of the so-called fragile five group of emerging markets, edging out Brazil and India, reports Steven Johnson for the Financial Times.
The two Latin American countries, along with Turkey, South Africa and Indonesia, are seen as developing countries overdependent on volatile foreign investment flows. The original fragile five were among the worst off during the taper tantrum of 2013 when foreign investors pulled out of the emerging markets.
“Brazil got its latest bout of bad news last week: inflation hit a 12-year high of 10%. Other gauges like manufacturing and consumer spending suggest its recession has only worsened this fall — a gloomy sign for Latin America’s overall growth,” according to CNN Money.
Amid a corruption scandal at Petrobras (NYSE: PBR), Brazil’s state-run oil company, high interest rates, a rising current account deficit and slack economic growth, Brazil stocks and ETFs have languished. Mexico is at risk as its reserve coverage ratio, or foreign exchange reserves divided by its funding gap, is just 1.6 years, which is less than the seven years of Russia, another oil exporter. Additionally, Mexico is constrained by its near-zero real interest rate, leaving little room to cut rates if its economy weakens.
“Brazil epitomizes the region’s hard times — it has greatly increased its exports and dependence on China over the past decade. While its economy is more diverse than others, Brazil still relies heavily on commodities,” reports CNN Money.
In what would be good news for wary emerging markets investors, developing world stocks may be nearing a capitulation point and some marquee banks are taking bullish views of this downtrodden asset class.
Some fund managers believe it will be a while before emerging markets stocks recover in earnest. Investors pulled out of riskier emerging markets as data showed growth from China’s economy slowed, commodity prices fell and the Federal Reserve signaled an interest rate hike this year. The China slowdown is fueling the lower commodity prices and lower outlook for other major emerging economies. Moreover, rising borrowing costs, a stronger dollar and rising corporate debt loads, with the International Monetary Fund warning of corporate defaults, are adding to volatility. [Area Emerging Market ETF Investors Must Monitor]
iShares Latin American 40 ETF
