Octavio Queiroz Ferreira, portfolio manager of the CCF Premium Ltd. fund, which placed first in the three-year Brazil equity category, says Brazil is probably the region’s most attractive equity market this year. Economic growth, controlled inflation, falling interest rates and a more stable exchange rate, are factors that should pave the way for sustainable growth of the economy, and in turn boost the local equity markets, says Queiroz.

In addition, Favrin says Brazil’s strong fiscal performance, a narrowing current account deficit, broader deregulation in important sectors such as utilities and increased confidence in the government and central bank are also positive. He believes these changes could even lead to an upgrade in Brazil’s debt rating.

“Brazil seems to be in a sweet spot,” said Campbell. “I think that for the first time in a long time, the stars are lined up for Brazil.”

Investors in Mexico are also optimistic about the country’s future.

The decision by Moody’s to raise Mexico to investment grade in March should give added momentum to both the Mexican and Latin markets in general. An investment grade rating will allow a new universe of US investors to buy Mexican assets, while investors looking for greater risk – and return – are looking to sub-investment grade markets, especially Brazil.

In addition, Mexico’s new trade agreements with the European Union, Israel and other Latin American countries, should begin reducing its dependence on the US. However, much of Mexico’s market performance this year will be shaped by the presidential elections in July and a smooth change of government at the end of the year. President Ernesto Zedillo has made elaborate preparations to ensure a crisis-free transfer of power. Severe economic and financial market crises have coincided with changes of government for the past quarter century.

Cruz says Chile should also do well this year, with the economy expected to grow by 6% and consumer spending growing even faster. For this reason, Cruz is increasing his investments in companies exposed to consumer markets, such as retail, consumer durables and banking.

Capital preservation is the main underlying philosophy at the Compass Appreciation fund, which placed first in the three-year asset allocation Latin America category. “We run a portfolio that is well diversified and liquid in order to ensure we can navigate the volatile waters of emerging markets,” explains portfolio manager Juan Bosch. Meanwhile, Manuel Balbontín, chief investment officer of the Compass Group, says improving conditions throughout the region has made the fund more comfortable with risk-taking and thus it continues to increase its equity exposure and the duration of fixed income instruments.

Felipe Padua of Opportunity Brazil Balanced Fund, warns that the performance of Latin America’s main economies still relies largely on an economic soft landing in the US. Regional equity markets depend on a continued strong performance by the main American markets. “Brazil is an importer of capital and if US companies don’t perform well, our valuations will suffer, too.” Although Padua remains bullish on Brazil, he says he is still cautious. Furthermore, he is holding many of his Brazilian stocks in ADR form, to avoid the high tax and transaction costs of trading on the São Paulo market.

Paul H. Rogers, senior vice president of Scudder Latin America, which manages the Brazil Fund Inc.- the top-performing fund for the 10-year equity Brazil category-says that the performance of the US equity market drives the performance of emerging markets. But Rogers also says that company and country fundamentals in Latin America have never been better. And Rogers points out, “The technological revolution in Latin America is just beginning.”

       

Fund managers must also contend with growing investor disaffection with the very concept of dedicated country and regional funds. In April alone, five funds dedicated to Latin America an nounced they were closing, in response to declining investor interest and dwindling stock market liquidity. Chase Manhattan is shutting down its Latin American Equity Fund plus three smaller funds. CIBC World Markets’ Mexico Equity and Income Fund Inc. and London-based Five Arrows Chile Investment Trust Ltd. are also going out of business.

This follows a broader trend among investors who lack the time or interest to monitor a profusion of regions, markets and funds. Assets held by Latin America dedicated US funds fell to $2.1 billion from a July 1997 peak of $5.7 billion, according to data from Financial Research Corp., a mutual fund consultant. Last year, Latin American funds lost an estimated $339 million, as inflows to global emerging markets funds totaled $914 million, FRC said.

Investors first started shunning specialized country funds after the first emerging market financial crisis erupted in Thailand in mid-1997 and reached its nadir in the early 1999 currency crisis in Brazil. Managers are now organizing their funds in broad, diversified portfolios in which they can move allocations swiftly in response to market conditions.