03.01.2012
By Terry Flanagan

LatAm Rises, Locals Lag

Rising Latin American investors should stir up lively capital markets participation, but experts say that’s not the case…yet.

The sell-side firms of Latin American are buzzing with new developments. Brazil’s premiere exchange, BM&F Bovespa has made significant investment in developing, new and consolidated product platforms to become a full-service sell-side shop. Its soon-to-be-launched cross-asset class Puma trading system, which will aim at slowly consolidating its separate trading execution platforms, has been in joint development with CME Group. The exchange is also attempting to consolidate its clearing houses into a single post-trade facility for buy-side traders.

The investment program to strengthen infrastructure of products has driven markets such as ETFs (exchange traded funds) and HFT (high frequency traders), according to BM&F chief executive Edemir Pinto.

Brazil’s sell-side upgrades are not in isolation; as other LatAm countries continue to see investor interest rise, so do their intentions to deliver easier market access. Mexico’s Bolsa Mexicana de Valores exchange invested nearly $11 million to upgrade technology in 2011, up from $3 million in 2010, according to Aite Group. Improvements to market access have been noticed by foreign institutional, investors, but local, individual investors that symbolize the region’s rising wealth are still slow to come to the capital markets.

“It’s all about who can access the local market. We’re seeing that that demand is from international, institutional, investors because right now, individual investors need to go through a U.S. broker to buy and sell securities and local issuances. Currently, that’s not simple,” said Daniel Gamba, head of BlackRock iShares Institutional business for the Americas.

Another issue is that much of LatAm’s activity happens in a non-public space, according to Gamba, who noted that local investors are making deals in the private market, accounting for the lack of trading in some of these countries.
Buy-side investors, such as global private equity firm Advent International have private LatAm funds that span more than $1 billion. Last July, the firm announced it would sell its 10% stake in Cetip, LatAm’s largest depositary and clearer of private fixed-income assets to global exchange, IntercontinentalExchange ( ICE), to put LatAm bonds on a global scale.

Brazil and Mexico are the LatAm’s top developing markets, and buy-side investors in the space are also starting to pick up ideas in Chile, Peru, and Colombia. But what about Costa Rica?

“I raised eyebrows when I heard we were going to offer a bond index for Costa Rica,” said Patrick Kerr, director of Latin American Markets for Dow Jones Indexes. The firm currently offers the Dow Jones LATixx index, family of fixed-income indexes for Latin America. Yet like the trajectory for most neighboring nations, Costa Rica’s economy and is now coming to fruition, with more transparency.

For now, Costa Rica’s government bond market’s remains plentiful in inventory, but the corporate bond market’s liquidity prospects are still dry as market access improves.

“As soon as there are more outstanding shares to support inventory, people will trade and that will support and lift the underlying availabilities of the bond market,” Kerr said.

While LatAm has been a shining star among the emerging markets, Gamba told Markets Media that patience is paramount for any investors looking to make long-term, easy entryways into the markets, citing that iShares products have taken a “long time to develop,” citing that the firm’s Mexican high-yield bond ETF, launched in 2007, is just gaining speed today.

“It may be 10 years before some of these products succeed and catch on with investors,” he said. “But eventually, no one can stop the global capital markets.”

A spokesperson from Advent would not directly comment for this story by press time.

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