Lagging LatAm stocks hit by sovereign risk-Salomon
Reuters, Wednesday, August 19, 1998 at 16:59
NEW YORK, Aug 19 (Reuters) - Lagging Latin American
equities are being hit by worries about countries' credit,
Salomon Smith Barney analyst James Barrineau said Wednesday.
In a report, he said questions about Latin American
nations' credit quality -- the so-called "sovereign risk" --
meant Mexican stocks were favored over Brazilian shares.
Russia's financial turmoil, including the de facto
devaluation of the rouble Monday, is the cause of the unease
about Latin American sovereign credit.
"Equity trading thus far this week, with the U.S. rallying
strongly and the Latin markets lagging, appears to reflect an
appreciation of increased sovereign risk as reflected in the
debt markets," Barrineau wrote.
Speaking of Mexico's devaluation of the peso in late 1994,
he said, "While emerging market debt spreads have once again
blown out, they have room to widen further if post-Mexican
devaluation levels are any guide."
Stock markets in the region have dropped about 31 percent
since the start of the year in dollar terms, according to a
Morgan Stanley Capital International index <.CEFL=USD>.
While the blue-chip Dow Jones Industrial Average has
rallied about 3.5 percent so far this week, Latin American
markets have been flat.
"One would have thought some relief in the U.S. would have
seeped south of the border," Barrineau said.
"The fact that it has not reflects an appreciation that
sovereign risk for the Latin countries has increased as
reflected in debt prices."
In early afternoon, a basket of Brazilian government bonds
was trading at a spread of 872 basis points over comparable
U.S. Treasuries, according to J.P. Morgan's Emerging Market
Bond Index. The spread for Venezuelan bonds was 1,433 basis
points above Treasuries.
Brazil, Latin America's biggest economy, is considered
vulnerable because of a stubborn public deficit. It also has a
currency that, like the rouble, is pegged to the dollar.
Venezuela is suffering from low oil prices and political
uncertainty heading into December presidential elections.
Mexican and Argentine debt reflected less risk. Relative to
Treasuries, Mexico's spread was 770 basis points over
Treasuries and Argentine debt showed a slightly wider spread of
733 basis points.
"For equity players, this continuing sovereign risk focus,
which implies a continuing market segmentation, favors Mexico,"
Barrineau wrote.
Copyright 1998, Reuters News Service |
