Once a bottom is struck, the longer term implications may actually be bullish for Latin America. Meanwhile, a whole new set of guiding principles apply to anyone who hopes to survive:
1) It is going to get worse before it gets better.
2) No business is immune, despite what might seem true. Remember Lehman: some institutions and product lines must die.
3) Markets will overshoot. The closer to the epicenter (i.e. the US and Europe), the greater the pain. Equities are especially vulnerable.
4) Regulation will rise as the esteem of the financial sector decays. Populism, nationalism and protectionism can follow closely behind.
5) Back to basics, cash is king. Forget derivatives and complex structures. In credit, think small, senior and short term. Now is not the time to be constructing an expensive foray into a new market.
6) Neither a ratings agency nor a large investment bank be. Better to be in legal services, retail banking or distressed trading. Boutiques and commercial banks will prosper.
7) Be agile, think laterally. Where high yield bond underwriting ends, liability management, M&A and restructuring advisory begin.
8) Expect consolidation. Just as investment banks have consumed each other, when markets shrink, a radical resizing must follow.
9) New money from unexpected places will assume fresh relevance. Think Middle East and China: get out and build a new clientele.
10) Take a long view. LatAm is doing remarkably well in the circumstances. Slower growth is not a catastrophe, and the inflation pressure is off.
Alongside the prevailing public hope and private despair of this year’s IMF meetings was the conviction that Brazil, at least, would bounce back from the pummeling it was getting at the hands of international markets.
However, there was a worrying complacency voiced by the senior Brazilian officials who went to Washington, some of them to gloat. None appears to have a plan B to confront what could be a prolonged global slump that is already starting to hurt exporters, particularly of raw materials.
The assumption is that Latin Americans have seen this all before, during decades of heightened volatility. The fact is that very few people still alive remember such horrific external markets, and that the countries who stopped them drowning in the last crisis are the same ones now going under.
The resilience mantra becomes even harder to believe as major corporates in Brazil and Mexico crumble under the pressure of derivatives speculation gone foul. Even blue chip Cemex took a hit, while major Mexican retailer Comerci filed for bankruptcy blaming FX losses.
Meanwhile, hopes that Argentina was (really this time) going to kiss and make up with capital markets were cruelly dashed as the president nationalized the country’s pension funds. A comprehensive deal with the holdouts looks unlikely, and other wayward debtors may also choose to throw in the towel, or renege on promises.
All is not lost though, and the developed world mess spotlights the allure of LatAm. The fittest will survive, and smart global portfolios may start to reallocate to longer term emerging growth.
China should also bounce back, rekindling a commodity rally. And the US, once shaken out of its complacency, has a track record of vigorous revival. A V-shaped recession is still possible.
Overall, valuations have tumbled into the bargain basement and some smart money is starting to buy dips. But the herd will hug the sidelines, and cash will continue to flow out. The crucial question for those entering is timing.
Developed world markets are in intensive care. The main LatAm economies continue to be merely concerned visitors, though some are also heading for the emergency room. The longer they avoid serious illness and the faster recovery grips the US and Europe, the sharper and more compelling will be the LatAm rally when global convalescence sets in. LF