Equity Markets Face Challenging Months

LatAm equity has outperformed other EM in the past month and quarter, but the next two quarters may be more challenging. “The short term outlook is more uncertain for LatAm equities,” says Geoff Dennis, head of equity strategy at Citi, referring to a 3-4 month timeframe. “If the global market continues to be weak, LatAm stands a chance of underperforming because it’s done so well until now,” adds the strategist. Bearish and volatile trading would keep the roughly 20 equity issuer hopefuls – mostly from Brazil – stuck in the pipeline. In the longer run, however, Citi maintains a bullish call on the region. It is constructive on EM and global equities if the US economy manages to turn around in the second half. The outlook for a continued up trend in commodities is still very positive, says Dennis. He notes that despite strong improvements in the region’s fundamentals, LatAm strength is largely supported by firm commodities, with oil, iron ore, copper, gold and pulp among the chief benefactors. LatAm stocks outperformed global EM in March for a seventh consecutive month, according to Citi, which points out the last time that happened was 1997. Brazil’s main equity index, the Bovespa, underperformed LatAm in March, falling 7.8% on the heels of an 11.9% surge in February. Peru dropped 5.1%, while Chile was the region’s strongest riser, gaining 7.7%, says Citi. Argentina and Mexico also had a positive March, rising 5.8% and 5.7% respectively.

UMS Brings $1.25 in Exchange Warrants

Mexico plans to sell warrants with a notional value of $1.25bn that will allow investors to exchange foreign currency debt for peso debt. On April 2 and 3, investors will be able to purchase two types of warrant that allows them to trade in 21 series of dollar, euro, deutschemark and Italian lira-denominated bonds with maturities between 2009 and 2034 for local bonds. The first warrant has a notional value of about $1bn and offers peso-denominated bonds due 2014, 2017 and 2036. The second is worth roughly $250m and offers 2017 and 2035 debt denominated in UDIs. Holders of the warrants will be able to receive their new bonds on October 9. This is the first Mexican warrant transaction to allow swapping into UDIs, as well as the first time the liquid global 2034s will be involved, according to a banker on the deal. This is the fourth sale of warrants since 2005. The government has exchanged more than $4bn in foreign-currency debt for peso bonds in the last two years. Barclays and Merrill Lynch are managing the transaction.