The present crisis in Latin American financial markets has not received the kind of end-of-the-world-is-nigh coverage accorded to previous emerging-market crises.
But that doesn’t mean investors aren’t showing signs of panicking; quite the opposite. Across the hemisphere, fund redemptions are running at record rates, as individuals sell out at market lows.
Latin America’s mutual fund industry has been dealt a severe blow this year: total funds under management plunged to $163.2 billion from $202.1 billion in just the three months from the end of March to the end of June. And while most of this was a result of falling asset prices, a lot of it was because scared investors pulled their money out: total redemptions reached $10.9 billion in June alone.
The vast majority of redemptions were from Brazilians, worried that if a left-wing president is elected in October, he might freeze access to their assets, Argentina-style. In the US, of course, investors have no such worries but that hasn’t stopped Americans from cashing in their Latin mutual funds at unprecedented rates.
Merrill Lynch has been tracking weekly redemptions in Latin American equity mutual funds since before the Mexican crisis of 1994-95. Merrill likes to look at the four-week moving average of fund redemptions: it’s long enough to give a statistically significant number but short enough to ensure that changes over time can be detected reasonably quickly.
The moving average always turns negative at the height of a crisis: in Mexico it reached -0.7%, during the Russia crisis it reached -1.8%. Three times – at the height of the Asian crisis, during the Brazilian devaluation, and at the beginning of the Argentine default in the wake of September 11 – the average weekly redemption reached -2.0%.
By mid-August this year, however, all those records had been broken, with an average of 2.8% of US holders of Latin American equity mutual funds cashing in their holdings every week.
Robert Bergés, senior Latin America strategist at Merrill Lynch in New York, says that similar numbers are being seen in fixed-income mutual funds as well, although there aren’t any funds confined purely to Latin American debt in the way there are with equity.
It looks as if problems in south America have engendered a mistrust of emerging markets as a whole, as well: in the second week of August, global emerging markets equity funds suffered $117 million in redemptions, 1.2% of their total assets – a record for the year.
Although 30% losses in the Latin American equity asset class certainly explain some of the selling, they’re not the only reason for it. After all, those individuals still invested in the region are the hard-core iron-stomached last men standing: the size of the asset class has shrunk to just $861 million today from over $4.3 billion at the end of 1997. Not since 1993 has the amount of money invested in Latin-specific equity funds been so low.
| Fund flows into 38 Latin America funds ($000s)* | |||||||
| 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | Week | |
| Total assets | 4,362,658 | 1,778,887 | 1,933,571 | 1,425,079 | 1,118,047 | 860,726 | 860,726 |
| Change due to flow | 511,362 | -1,400,479 | -355,282 | -319,939 | -291,422 | 82,211 | -23,782 |
| Change due to performance | $931,756 | -1,183,292 | 509,966 | -188,553 | -15,610 | -339,532 | -17,666 |
| % change in assets | 49.40% | -59.20% | 8.70% | -26.30% | -21.50% | -23.00% | -4.60% |
| % change in flows | 17.50% | -32.10% | -20.00% | -16.50% | -20.40% | 7.40% | -2.60% |
| % change in performance | 31.90% | -27.10% | 28.70% | -9.80% | -1.10% | -30.40% | -2.00% |
| As at 14 Aug 02 | |||||||
| Source: AMGDS | |||||||
Shrinking appetite
So why are these investors selling now, when they didn’t in past crises? “This is something you didn’t see before,” says Bergés, “this kind of panic from a retail investor base.”
The answer surely lies not in domestic Brazilian politics but rather in the state of the US stock market. Risk appetite has fallen along with the Nasdaq, and investors can no longer mentally offset their emerging-market losses against their technology-stock gains.
It’s yet another blow to Latin America’s financial markets. First of all the dollar-denominated debt markets dried up and then the more retail-centred euro-denominated markets closed as well, after hundreds of thousands of European holders of Argentine debt saw their bonds default.
In the second quarter of the year, billions of dollars-worth of mutual funds were redeemed in Brazil and elsewhere in south America, the proceeds destined for safer shores. And now American retail investors are also pulling out of the beleaguered Latin equity markets.
No-one is calling a bottom, either, despite the fact that fund redemptions are generally lagging indicators and can be a sign of what some analysts like to call “capitulation”. In a capital-starved region such as Latin America, it’s not enough that investors stop selling for the markets to recover. Rather, money has to start flowing back in to the region, and there’s no sign at all of that. For all that they sold far too late in the game, America’s panicky retail investors might have made a smart decision.
