By Alexander Ragir and James Attwood
Brazil's stock market in the mid- 1990s took almost two years to recover from a 61 percent drop in the Bovespa index caused by the Mexican peso's 1994 devaluation.
This year, the Bovespa came back in six weeks from an 11 percent February decline after a stock selloff in China spread worldwide. Chile and Mexico showed similar resilience.
One reason Latin American stocks are bouncing back faster: the number of local investors has increased, making trading ``more robust,'' said Goldman Sachs Group Inc.'s Paulo Leme. New rules that allow investing throughout the region will support stocks as local fund managers seek bargains after this month's selloff. Brazil's market value has grown fivefold since Mexico touched off the so-called Tequila Crisis more than a decade ago.
``The market liquidity increases so you're less prone to see overshooting of prices and huge collapses in prices,'' Leme, managing director for emerging markets at Goldman, said in an interview from Miami.
With the Brazilian index off 15 percent since July 19, this time because of U.S. subprime mortgage concerns, fund managers such as Eric Conrads of Chile's AFP Santa Maria fund and Ricardo Malavazi of Brazil's Petros Fund plan to buy. The Bovespa rose 2.5 percent the past two days. Chile's Ipsa index gained 3.2 percent.
``This has never happened before: very strong wealth creation, recycled within countries and the region,'' Conrads said in an interview in his Santiago office.
Fivefold IncreaseStock investment by Latin American pension funds, mutual funds and insurance companies jumped fivefold in the past four years to $286 billion, according to Merrill Lynch. That compares with $111.3 billion invested in the region's stocks by international funds tracked by Boston-based Emerging Portfolio Fund Research Inc.
Local investors helped ``stabilize'' the Bovespa last year by buying stocks when foreign investors fled riskier assets from May to September, Thierry Wizman, an emerging market strategist at Bear Stearns & Co. in New York, wrote in a March 15 note. When the market surged to new highs from October to January, domestic investors were net sellers of equity as the price surge increased the percentage of stocks in their portfolio, he wrote.
Not only do local investors cushion share swings, they are driving a trend toward stock market integration throughout the region, Wizman said in an interview. Regulators in Chile, Brazil and Mexico have eased rules this year on stock-buying and investing outside their home countries.
``The first place they would look would be in the region,'' said Alex Ingham, who helps manage the equivalent of $8 billion in emerging market stocks at Morley Fund Management in London. ``It's what they're familiar with.''
Regional FocusChilean regulators passed legislation on Aug. 9 that will allow pension fund managers to invest 35 percent of their assets abroad. Lawmakers are discussing eventually loosening the limits to 80 percent as part of a package of changes in the retirement system proposed by President Michelle Bachelet.
Brazilian regulators in May approved a rule allowing pension funds to invest as much as 20 percent of their assets abroad and doubled the percentage these funds can hold in so- called multimarkets funds, which include stock investment.
In Mexico, where pension funds known as Afores were prohibited from buying stocks before 2005, regulators in April doubled the limit of equity holdings, both foreign and domestic, by pension funds to 30 percent of total assets. Mexico's stock exchange signed agreements with Chile, Brazil, Colombia, El Salvador and Peru allowing local investors to trade shares there, said Alberto Maya, a spokesman in Mexico City.
At the LimitThe looser foreign investment limits are ``coming at the right time to pick up some nice assets'' in Latin America, said Conrads, who oversees $11 billion and holds 5 percent of his global stock portfolio in Brazil, his second-biggest country holding of any emerging market after Chile.
His fund was ``maxed-out'' under foreign investment limits for holdings including Luxemburg-based HSBC Global Investment Funds Brazil Equity. Preparing for the limits to be lifted, he was studying up on funds that take advantage of Brazilian consumer growth.
Tonatiuh Rodriguez, who manages $4.2 billion at Afore XXI pension fund in Mexico City, said he plans to reach the new cap on equity investment about a year after the changes take effect in January.
``Private pension funds have been hiring people with expertise in equities and risk management,'' Rodriguez said in an interview. ``The moment the funds have a chance to take advantage of the new law, they will quickly reach the limit.''
Economic RiskGrowth of institutional investment within the region is part of the ``evolutionary process'' of emerging markets, said Barry Olliff at City of London Investments in Coatsville, Pennsylvania. It will not necessarily stabilize them, he said.
``You have volatility because of geopolitical or economic events,'' said Olliff, who helps manage $3.9 billion in emerging markets assets. ``A pension system doesn't mean that this won't occur.''
Local investors are more bullish after five years of stock gains, propelled by economic growth and slowing inflation, said Donald Elefson, who manages the $1.2 billion Excelsior Emerging Markets Fund at U.S. Trust Co. of New York.
``An indigenous equity culture is on the rise,'' he said.
Latin American shares averaged a 48 percent yearly gain from 2003 through 2006, more than double the 20 percent average gain for shares in 23 developed markets in the same period, Morgan Stanley Capital International indexes show.
Of assets managed by pension funds, mutual funds and insurance companies in the six largest Latin America economies, 28 percent is in stocks, up from 15 percent in 2002, strategists at Merrill Lynch wrote in a July 20 note.
Malavazi, the investment director at Petros, Brazil's second-largest pension fund, is buying stocks during selloffs, doubling the $17.3 billion fund's holdings in stocks from 2003 to 31 percent, as interest rates in the country fell to a record low.
The fund plans to boost its equity holding to 45 percent by the end of the year, Malavazi said in an interview in Sao Paulo.
