LATAM equity markets: A bubble atop a bubble?
High oil prices pushed Latin America’s equity markets to dangerous levels. In a new era where emotions about oil scarcity run high, Latin America is perceived as a big, endless supply of commodity wealth. But keep an eye on the volatility.
Today, global capital markets are a complex collection of bubbles. Many commodities are trading near all-time highs – a frothy peak springing directly from Asia’s voracious manufacturing appetite combined with limited global supply capacity. (After all, who wants a new lead-smelting plant or refinery opening up in their backyard?)
Yet few asset classes are perched so precariously high as those that are a bubble on top of a bubble – notably Latin American equity markets.
Almost all equity markets in Latin America are trading near historical highs. The MSCI EM Latin Index has rallied to almost 2500, up 9% so far this year and a multiple of the levels near 500 seen in early 2003. This price run, judging by what the correlation function on Excel says, is more than 70% a result of the run-up in the price of West Texas Intermediate crude. Whether any Latin economy produces much WTI is irrelevant. Argentina does not export crude and Venezuela’s PDVSA pumps mostly Tia Juana Light.
The point is that in a new era where emotions about oil scarcity run high, Asia has enormous amounts of cash to invest, and Latin America is perceived as a big, endless supply of commodity wealth.