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Market Review: Latin America
The concern about the recession in the United States and its effect on global growth created a sharp decline in global markets in the first part of March. The MSCI Latin American index also declined during this period and ended the month with a decrease of 3.4%. On a country by country basis, the Chilean, Argentine and Mexican indices all posted gains with increases of 7.7%, 5.8% and 5.8% respectively. With the correction in commodity prices, countries such as Brazil and Peru, with high weightings in natural resource stocks, declined 7.6% and 5.1% respectively.
Commodity stocks were hit particularly hard during the beginning of March, however, rebounded with global markets during the last week of the month. Petrobras, a Brazilian commodity stock, accounted for approximately 19% of the MSCI Latin American Index. Petrobras ended the month with a decrease of 13.0%. Similarly, RIO, the world’s leading iron ore producer, accounted for approximately 13% of the MSCI Latin American Index and also declined by 0.6% during the month. In March, RIO ended negotiations that could have led to the acquisition of Xstrata, an Anglo-Swiss mining group which would have created the world’s largest mining company by market value.
March’s volatile performance highlighted the market’s concern of the potential negative effect a global slowdown would have on commodity oriented companies. Adding to this fear is the concern that commodity prices are no longer driven only by increased industrial demand, but also by financial innovation in the form of ETFs indexed to commodity futures. It is estimated that commodity index-based products account for approximately 25% of all commodity “bets” outstanding. Financial products indexed to commodity futures have opened up the asset class to a greater number of investors. This includes hedge funds and individual investors who, as March showed, may react quickly and pull out of commodities after any indication of a global slowdown.
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