Latin Assets on the Rebound

Latin American assets have retraced some of their losses, but strategists are split on whether this is more than just a dead-cat bounce. Wednesday saw Mexico’s Bolsa and Brazil’s Bovespa gaining 0.83% and 1.73% respectively, but they lost 5.8% and 6.6% the previous session, respectively. Merrill Lynch says the Tuesday dip was a short-term event that does not reflect a shift in investors’ positive view of EM fundamentals. JPMorgan agrees that the sell-off should not be likened to the broader May 2006 correction. Others such as Lehman take a more bearish view, saying the correction process could last up to a month as the markets digest adjustments in Chinese policy and the US subprime mortgage market, though in the medium term, it predicts that risk aversion will subside. WestLB’s Ricardo Amorim says that while there may be a correction underway, it presents a buying opportunity as LatAm assets are set to recover. CreditSights heralds a new market environment where investors will be more cautious, lenders more discriminating and companies more pessimistic. We expect cash that has been accumulating on the sidelines to be put to work on the dips.