Latin America's Main Markets Mirror Nasdaq's Bumpy Ride
By JENNIFER L. RICH
Brazil, April 27 -- With the Nasdaq oscillating
sharply this month, Latin America's two principal markets, the
Bovespa of Brazil and the Bolsa of Mexico, have gone along for the ride.
have always been buffeted by instability in the United
States as anxious investors pull out of what are considered high-risk
positions elsewhere. But because Latin American markets have been
dominated by brick-and-mortar companies, they have usually been
linked to the Dow, not the technology-heavy Nasdaq. This new
relationship has confounded investors, particularly now that the Brazilian
and Mexican economies are booming.
Since the beginning
of the Nasdaq swing, the Bovespa index has
dropped to 15,440, after rising to a high of 19,046 in March. In Mexico,
the Bolsa index has fallen to 6,844, from a high of 8,417, also in March.
Some of the current downward pressure can be directly linked to the
market in the United States.
"It was Nasdaq
euphoria that fueled the markets in the fourth quarter,"
said David Chon, Latin America equity strategist for Bear, Stearns.
"After running up significantly, some of the froth is now coming off of the
Indeed, the telecommunications
sector, which makes up about 50
percent of the Bovespa, has led Brazil's downward trend. The shares of
CRT Cellular, for example, which is controlled by Telefónica de
España, fell from a high of 899 reais ($499.20) in March, to 609 reais at
today's close. CRT is one of the cellular companies in Brazil that plans to
start wireless Internet services by June.
companies are all earning revenue from the Internet," said
Julio Zeigelmann, director of equity funds at BankBoston Asset
Management in São Paulo. "It makes sense that decreasing optimism in
the Internet would affect us locally." In Mexico, Teléfonos de Mexico has
also taken a hit, closing today at 28.4 pesos (3.01), 22 percent below its
52-week high of 36.2 pesos on March 7.
But since technology
is still a nascent industry in Latin America, most
companies -- including telecommunications concerns, which are still
trying to meet demand for regular fixed-line service -- are still squarely
part of the traditional economy. That makes for a tenuous connection
between Latin American stocks and the Nasdaq.
doesn't have much logic," said Octavio de Barros, chief
economist of BBV Argentaría in São Paulo. "When the market realizes
that the Bovespa is not linked to the Nasdaq, we could have a rally."
in Latin America, and particularly in Brazil, are
undervalued now that stock prices have fallen, with many trading below
book value, according to many analysts. They say that the flight to quality
that normally occurs during market turbulence should reverse once the
value of Latin American stocks becomes widely known.
released this week have also animated investors. On
Tuesday, for example, the Mexican cement company Cemex announced
that operating profit rose 22 percent in the first quarter compared with
the 1999 quarter, beating analyst's expectations. The positive news
follows impressive results announced last week by the Brazilian steel
company CVRD, which increased profits 98 percent in the first quarter
over the comparable period last year.
reports followed positive economic news coming out of
Latin America. Since the Russian debt crisis in 1998 sent investors
running from Latin America and forced Brazil to devalue its currency, the
region has had a quick recovery. Latin America is expected to grow 3.7
percent this year, up from 0.2 percent last year, according to estimates
from ING Barings.
also shown some decline this year. The region should finish
the year with inflation at 6 to 8 percent, compared with 8.8 percent last
year. The International Monetary Fund recently revised its inflation target
for Latin America this year to 7.7 percent from 8.4 percent on strong
economic activity coming out of the region.
also recently passed important legislation, the Fiscal
Responsibility Law, which establishes austere spending and indebtedness
limits for the local, state and federal governments. The Brazilian
government has been battling large deficits for years, and indebtedness
was a primary cause of investor uncertainty in the devaluation last year.
The budget deficit
now stands at 3.6 percent of the country's gross
domestic product, but with the new law and the economic recovery, the
government expects the deficit to fall to about 2 percent of G.D.P. in
In Mexico, investment
activity, which has been strong this year because
of ties to the United States through the North American Free Trade
Agreement, is expected to slow before the presidential election
scheduled on July 2.