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Portfolios, Risk and Inflation: Challenges for Latin American Investors

Peter Weiner, Senior Managing Director
State Street Global Markets
December 2011

Years of financial discipline, sound macroeconomic policies and an Asia-led commodity boom have given key Latin American countries several years of robust economic growth expanding local investment funds. To guard against concentrated local risk and global market contagion, Latin American institutional investors are developing event-sensitive portfolios that seek to diversify risk and mitigate market turbulence.

Latin American success brought familiar macroeconomic side effects. Growth led to robust employment, rising wages and inflation, which pushed up local currency valuations and the risk that those gains might be reversed. Although Latin American economies have been running hot, policymakers are preparing for the slower growth rates and currency volatility that may come with reduced commodity prices and increased global market dislocation.

For those Latin American institutional investors responsible for the region's burgeoning mutual funds, pension funds and sovereign wealth entities, the region's vigorous economic growth has also proven beneficial. High commodity prices, growth and employment have engendered substantial new cash inflows and robust returns.

Latin American mutual funds totalled more than US$1 trillion at the end of 2010 and are expected to double by the end of 2015. The privatised pension systems of Chile, Mexico, Colombia and Peru managed US$344 billion as of the same date and are expected to grow to more than US$675 billion over the next four years.1

Growing asset pools have provided deep liquidity for local capital markets, which have in turn driven down the cost of capital, creating economic growth in a virtuous circle. But positive local investment markets have also left these investment funds with highly concentrated risk. Were a global slip in the price of commodities to impact Latin American economies as a whole, the effect on local investment pools highly exposed to local economies could have a compounding, negative impact.

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