Latin American GDP growth in relation to other emerging markets has been lackluster over the last few years. With the notable exceptions of Chile and, from a more cyclical perspective, both Argentina and Venezuela, Latin growth has been hovering in the 3 percent to 4 percent range – good but not very exciting.
Nonetheless, Latin American companies have been strengthening their profitability as a whole while local regulators have been tightening measures to improve corporate governance standards. Macroeconomic indicators such as the current account, the government budget deficit and inflation are all much better behaved than in the past and, perhaps most importantly, the banking systems in Latin America have never been as sound and as poised to support future credit growth as they are today. As a result, Latin indices such as the FTSE Latibex have skyrocketed by more than 80 percent in 2005. With an increasingly more democratic Latin America in vogue, regardless of political flavor, the future looks bright indeed for the region.
Carpe diem
Latin American companies have seized the moment and are increasingly coming to market. Local and foreign issues are on the rise, which is consistent with the search for finance from all four corners of the world. In particular, Latin American companies have long understood that access to the US stock markets, the deepest capital market in the world, is vital for their future growth prospects. Arbitrage between the local market and dollardenominated depositary receipts in New York has been shown to improve the trading and liquidity characteristics of most dual-traded shares, which are welcome and familiar instruments for global investors.
More recently, Latin American issuers have also had access to the Spanish stock market via Latibex. Launched a scant six years ago, this euro-denominated segment of the Madrid Stock Exchange currently hosts 36 companies from seven Latin American countries with a market capitalization exceeding €200 bn. This represents less than a quarter of the total Spanish stock market, but the point is that the Latibex trades stocks in euros and opens the huge European capital market to Latin American stocks.
Jesus Nieto, director of the Latibex, explains the advantages of the exchange: ‘Listing on the Latibex allows companies easy access to the European capital market and increases the opportunities to finance themselves in euros. The Latibex provides a simple and efficient means for Latin American companies to achieve visibility among European investors. Additionally, a robust retail market (more than 4 mn Spaniards invest directly in shares) is also acting as a powerful inducement for these companies. In summary, the Latibex is an attractive showcase that investors are increasingly following.’
Speed and transparency
Unlike the way ADRs work, the Latibex trades original shares in euros electronically via SIBE, guaranteeing speed and transparency. It also provides attractive time zone characteristics, allowing investors to continuously trade in Latin American shares over a ten to twelve hour window.
The Latibex has also stimulated more information flows to investors given that many Spanish banks and brokerages have intensified their coverage of Latin American companies, providing more analysis to the market. Further, the information available from Latin America to Spanish companies is first rate since many of these agents are key players in the local markets, following a renaissance of Spanish foreign direct investment in the region in the last ten years, rivaled only by the US. Finally, the Spanish stock market is one of the least costly in the world.
Many issuers are clear on the advantages of trading on three exchanges – local, US and now the Latibex. Luiz Fernando Rolla, IRO at Cemig of Brazil notes, ‘The Latibex is important for Cemig because it has strengthened our relationship with European investors. In terms of trading volume, the amounts traded are still small in relation to those of the NYSE and São Paulo. We trade as part of the Bovespa’s Level 1 corporate governance program, and in recognition of our strategy oriented
towards sustainability and social responsibility, Cemig was selected as a component of the Dow Jones Sustainability Index for the fifth consecutive year – the only Latin American electricity company in the index. Nonetheless, our presence in the Spanish market is important to maintain direct channels of contact with European investors.’
Mexico’s Corporación Geo also sees benefits in listing on the Latibex as well as the Bolsa Mexicana de Valores (BMV) and the NYSE. ‘Corporación Geo was the first company in our sector to list on the BMV and in the US through a Level I ADR program. Then, in September 2005 we were also the first homebuilder to begin trading on the Latibex,’ says Jorge Pérez Rivero, IRO. ‘This strategy has been very important for opening new doors and channels with the objective of offering a higher added value to all of our investors. This has also represented multiple benefits for Geo that translate into attracting the attention of new investors, obtaining a stronger international position and offering higher visibility in the global markets.’
Growing liquidity
Investors still see most liquidity concentrated in the local Latin American markets or in New York, but the Latibex is making steady progress. In 2005 volumes expanded by 85 percent and spreads in relation to local prices narrowed from an average of 1.68 percent in the previous year to 1.13 percent, with the largest market cap stocks trading with less than a 1 percent spread. Nonetheless, farsighted players like Hernán Rodríguez, vice president for Latin America at the Bank of New York, believe liquidity bridges between US exchanges, local markets and the Latibex will further enable three-way arbitrage among three exchanges and three currencies. Playing the Latin American triangle provides a win-win on all sides by expanding efficiency, information and trading hours while directly connecting investors on both sides of the Atlantic with Latin American companies, all of which encourages even more trading and liquidity.
Jaime de Piniés
Senior managing director and chief economist
The Global Consulting Group
jdepinies@hfgcg.com
