Institutional investors are expected to return quickly to parts of Latin America - and some already have - in the aftermath of last month's financial earthquake in Mexico.
Early on, the Mexican crisis sent tremors throughout Latin America, as many investors fled markets that might share some of Mexico's political and economic ills.
But once the dust settles in Mexico, investors' interest in Latin America and other high-growth emerging economies should rebound, many think.
In the broad scheme of things, Mexico's "is a short-term" problem, said Jane Hackam, investment director of Beta Funds in London. "The fear that this is the end of Latin America has been exaggerated."
Already, some money managers have begun shopping for bargains in parts of Latin America. And many pension funds appear likely to boost their overall emerging market exposures this year. In late 1994 (before Mexico's currency crisis), 32.1% of U.S. plan sponsors surveyed by Pensions & Investments said they expected to increase their emerging markets holdings in 1995.
That trend isn't likely to collapse with the plunge in the Mexican peso. Certainly, "the crash in Mexico hurt those who were invested there; but for those waiting to make allocations, it makes it easier to buy in. So most pension funds will go ahead with plans" for investing in emerging markets, predicted Adam Spector, director, international investment group, SEI Asset Management, Wayne, Pa.
But for the near future, many investors may remain wary of Mexico's markets.
Mexico was once viewed as a darling of the emerging markets and grew to one of the largest in market capitalization. But many investors had overlooked such yawning problems as the country's current account deficit untilit was too late, and the result was a stunning blow to portfolios. For calendar year 1994, Mexico's market in dollar terms plunged 39.7%, according to the International Finance Corp. That made it the first time since 1987 that Mexico's market posted an annual decline, according to IFC data.
Because of the spillover effect, other Latin American portfolios took it on the chin. According to Lipper Analytical Services, New York, 11 open-end Latin American equity mutual funds posted an average 14.24% drop for 1994, making them last year's single worst performer of any class of equity funds. In the third quarter, Latin American funds had outperformed all other categories; but the average 23.92% drop (for 15 funds) in the final quarter proved fatal.
To Michael Perelstein, international investment director of MacKay-Shields Financial, New York, the Mexico debacle bodes badly for emerging markets investors.
"It could be for the (international) investor on the street what the financial crisis of the early 1980s was to the banking industry," Mr. Perelstein warned. Many could be hurt, given the hefty interest in emerging markets investing in recent years. And problems for emerging markets investors won't soon disappear. "The fear is that Mexico is a Cadillac compared with Brazil in economic policies," he said.
But apparently few managers share such severe views about emerging markets. Others feel Latin America's long-term prospects remain attractive, and recent declines in some hot markets, such as Brazil's, have spawned buying opportunities.
Some managers already are seizing the moment. William Truscott, assistant portfolio manager of the Scudder Latin America Fund, said the fund "recently took advantage of price drops in the markets of both Brazil and Argentina." He especially likes Brazil, which is benefiting from a new economic agenda and an economy expected to grow about 4.5% this year.
Beta Funds' Ms. Hackam also "started buying - a little - in Brazil" after the recent crisis, she said. The fall in Brazil's market had been unjustified by the fundamental factors, and therefore unleashed "good value," she explained.
Some managers have even done, or plan to do, some shopping in Mexico. After the peso's devaluation, Acadian Asset Management, Boston, moved in to "do a little buying" in Mexico, said portfolio manager John Chisholm. While he didn't name stocks he likes, he did say he favors companies with sizable earnings from exporting, which could benefit from the currency's devaluation. (Not surprisingly, he and other investors don't favor Mexican companies with high levels of dollar-denominated debt.)
RCB International, a manager of managers in Stamford, Conn., had been very underweighted in Mexico when the currency crisis erupted, said President Edgar Barksdale. "But with a collapse of this kind, our attitude is to start looking for opportunities instead of running away. You let the dust settle, then evaluate" the possibilities, he said.
Of course, many managers still are steering clear of Mexico on the perception that selling could endure for months in the aftermath of the crisis. That negative view was reinforced last week. In a bad start to the new year, Mexico's markets declined even after President Ernesto Zedillo unveiled his economic emergency plan.
To calm investors and subdue feared inflation, Mexico's new president announced a program including wage and price restrictions, cuts in government spending, plans for more privatizations, and support for the currency.
This package was less than impressive to investors. Initially, many shared the reaction of Rodolfo Amoresano, a managing director at Nomura Securities International Inc. in New York, who called "the president's overall message positive; but it was disappointing in its lack of anything with teeth. It was missing the necessary cold, hard numbers" to flesh out President Zedillo's intentions, Mr. Amoresano said.
For this and other reasons, many portfolio investors probably will avoid Mexico for a while. Even before the devaluation, London-based Baring Securities had recommended cutting back on Mexico - to 30% of a Latin American portfolio from the 35%.
But in any case, Mexico may not depend as heavily on foreign portfolio investments in the future. Especially since December, Mexico's leaders seem increasingly clear that their better hopes for reducing the current account deficit lie, for one thing, in attracting more direct investments, in plants, equipment and the like. These investments should prove more beneficial and enduring than transient portfolio outlays.
But will Mexico be able to attract substantial direct investments from abroad? Apparently so. According to Robert Gay, emerging markets research director for Bankers Trust, New York, this year's direct investments into Mexico chould reach $11 billion, compared with an estimated $7.5 billion in 1994 and a much smaller $4.9 billion the year before. As a result "portfolio investors don't need to come back" to Mexico to the same degree they had been there before, said Mr. Gay.
Of course, large direct investments alone won't cure Mexico's large and unsettling current account deficit. Along with direct stake investments must come such "structural" improvements as expanded oil production for export and enhanced port facilities; along with the devalued currency, these moves ought to help correct Mexico's trade balance, he said.