Spreading the Word
21 Feb 2024
Three of Latin America’s asset servicing providers reflect on the past year, the state of the markets and look ahead to a number of key elections in the region
Image: anton_balazh/stock.adobe.com
LatAm markets are on the rise and asset service providers in the region are optimistic that the market will only grow further. However, with a series of elections set to grip the region, the providers must be prepared for volatility and change.
Flipping the playing field
There is lots to be positive about for the upcoming year for LatAm, at least according to Maria Calderon, the head of LatAm Sales at MarketAxess. Calderon smiles as if she can see the success of the new year rolling in already, saying: “We’re very hopeful that the playing field has flipped and this year we’ll see a cut, even if it’s in the second half of the year. That’s already causing a lot of optimism. Market participants are very active and very engaged.” She adds an almost rallying cry: “I feel like emerging markets are back, LatAm is back and we’re all here to participate.”
Her hopefulness is shared by Claudia Calderon, head of Hispanic LatAm in securities services at BNP Paribas, who speaks to the attractiveness of the markets. She says: “Historical returns are above developed markets and strong liquidity levels, driven by the presence of relevant local entities such as private pension funds and top-tier foreign institutional investors, make LatAm an attractive destination for both local and international investors. Additionally, some of the most relevant economies in the world are in the region.”
M. Elena Mesonero Lázaro, managing director of Spain and LatAm at Caceis, also agrees. She explains: “LatAm remains an attractive region for investors due to the high real yields, especially in the markets with lower volatility due to political, economic and regulatory stability. Even though inflation and interest rates are expected to fall in most LatAm countries, over the medium-term there should still be value in the fixed-income markets.”
Lázaro continues to speculate on the future of the market. “LatAm is looking to 2024 from a better standpoint, attracting capital despite the headwinds they face. Most of the region’s largest economies have managed inflation, which should come down, although maybe more slowly than in 2023. This will pave the way for a less restrictive monetary policy in 2024, particularly in Brazil and Chile. Argentina, on the other hand, will probably be an outlier where inflation will increase.”
One of the key focuses for the asset service industry in 2024 is a series of elections that could impact the markets.
Election fervour
With some of the world’s leading powers holding key elections, 2024 can be considered a key year for democracy. In LatAm, El Salvador, Panama, the Dominican Republic, Uruguay and potentially Venezuela are set to have elections this year, as are Mexico and the US. This begs the question, how much will these elections impact asset servicing practices?
“Political stability is the foundation for trust, transparency and stable regulation,” Caceis’ Lázaro says. “These are key to helping both local and international investors set up new projects and to increasing domestic and international capital inflows to the markets.”
Lázaro and MarketAxess’ Calderon both identify the Mexican election in June as the defining one for the year ahead. Divulging further, Lázaro says: “The outcome of Mexico’s presidential elections will have a major impact on future fiscal policy, nearshoring and inflation, while the outcome of US elections will be important for relations between both countries.
“Our role is to support investors and closely follow regulators’ actions to remain informed about how any potential legal changes could affect our clients’ investments.”
Across LatAm, there are currently 12 left-wing governments in power across the region’s 19 countries. How do asset service providers respond to a potential left-wing government coming into power with potentially increased regulation on the sector?
Caceis’ Lázaro continues: “These governments favour state-ownership of certain businesses, higher spending, greater powers to intervene in markets and are also more protectionist, all of which are causes of concern for many investors.”
The election in Argentina, South America’s second largest-economy, last year sent shockwaves across the region and beyond as far-right libertarian Javier Milei was elected president.
The election of Milei ‘immobilised’ the markets, MarketAxess’ Calderon explains. “So many times last year, we saw the markets completely paralyse. Nobody moved and nothing happened.” She freezes for effect before adding, “It was like crickets: nobody would say anything, nobody would do anything. Political instability has a tremendous impact on the markets.”
Despite this paralysed state, Calderon believes that the development of e-trading has changed the industry greatly.
Providing a platform
What could be described as fluctuating conditions for the markets in the region, MarketAxess’ Calderon believes the ability to trade electronically can mitigate volatility.
She explains: “For MarketAxess, whether it’s good or poor bad trading conditions, usually, we see inflows and outflows on our platform.
“The activity seen in Argentina following the election was very interesting, given the enormous outflows out of the country. It was our most actively traded sovereign on the platform, despite the volatility and despite trading like a distressed asset.”
Calderon argues that the region has benefited from the growth of electronic trading, and is catching up with North America and Europe. She says: “In the US and Europe they are now going into very complex protocols of automated portfolio trading, but the international markets are rapidly catching up. We had a record number of new clients in 2023 coming from the international markets, demonstrating that the word is spreading.”
On the other hand, Caceis’ Lázaro is more sceptical, stressing that electronic trading has not had as much impact “as other developed markets in the US and Europe. There is increased demand from local and international investors for e-trading access, driven by markets like Brazil and Mexico. This would provide greater liquidity and transparency through standardised trade reporting and increased access to data.”
The expansion of local markets remains a central focus for all three asset service providers.
From strength to strength?
BNP Paribas’ Calderon explains that “the merging of Colombia, Peru and Chile’s stock markets stands as a pivotal achievement for regional market growth. In 2023, the creation of the unified holding, NUAM, heralded a new era of opportunity.”
Calderon emphasises that this opportunity will only bring further optimism and build on the existing positivity in the region.
“Now the holding is crafting every aspect of this integration project, poised to unveil a seamless marketplace by the third quarter of 2025.”
On currency, “I think we’ll see a return in the hard currency side,” she says. “It was fully depressed last year and 2022. So I think we’ll start to see stabilisation of the hard currency valuations and and a comeback to the new issue markets.”
She returns once again to electronic trading and the growth of local markets, concluding that “I would expect for local markets to continue to grow in electronic trading and for the process to continue to speed up based on the protocols that we offer, on the liquidity that we offer, and the spreading of the word.”
Flipping the playing field
There is lots to be positive about for the upcoming year for LatAm, at least according to Maria Calderon, the head of LatAm Sales at MarketAxess. Calderon smiles as if she can see the success of the new year rolling in already, saying: “We’re very hopeful that the playing field has flipped and this year we’ll see a cut, even if it’s in the second half of the year. That’s already causing a lot of optimism. Market participants are very active and very engaged.” She adds an almost rallying cry: “I feel like emerging markets are back, LatAm is back and we’re all here to participate.”
Her hopefulness is shared by Claudia Calderon, head of Hispanic LatAm in securities services at BNP Paribas, who speaks to the attractiveness of the markets. She says: “Historical returns are above developed markets and strong liquidity levels, driven by the presence of relevant local entities such as private pension funds and top-tier foreign institutional investors, make LatAm an attractive destination for both local and international investors. Additionally, some of the most relevant economies in the world are in the region.”
M. Elena Mesonero Lázaro, managing director of Spain and LatAm at Caceis, also agrees. She explains: “LatAm remains an attractive region for investors due to the high real yields, especially in the markets with lower volatility due to political, economic and regulatory stability. Even though inflation and interest rates are expected to fall in most LatAm countries, over the medium-term there should still be value in the fixed-income markets.”
Lázaro continues to speculate on the future of the market. “LatAm is looking to 2024 from a better standpoint, attracting capital despite the headwinds they face. Most of the region’s largest economies have managed inflation, which should come down, although maybe more slowly than in 2023. This will pave the way for a less restrictive monetary policy in 2024, particularly in Brazil and Chile. Argentina, on the other hand, will probably be an outlier where inflation will increase.”
One of the key focuses for the asset service industry in 2024 is a series of elections that could impact the markets.
Election fervour
With some of the world’s leading powers holding key elections, 2024 can be considered a key year for democracy. In LatAm, El Salvador, Panama, the Dominican Republic, Uruguay and potentially Venezuela are set to have elections this year, as are Mexico and the US. This begs the question, how much will these elections impact asset servicing practices?
“Political stability is the foundation for trust, transparency and stable regulation,” Caceis’ Lázaro says. “These are key to helping both local and international investors set up new projects and to increasing domestic and international capital inflows to the markets.”
Lázaro and MarketAxess’ Calderon both identify the Mexican election in June as the defining one for the year ahead. Divulging further, Lázaro says: “The outcome of Mexico’s presidential elections will have a major impact on future fiscal policy, nearshoring and inflation, while the outcome of US elections will be important for relations between both countries.
“Our role is to support investors and closely follow regulators’ actions to remain informed about how any potential legal changes could affect our clients’ investments.”
Across LatAm, there are currently 12 left-wing governments in power across the region’s 19 countries. How do asset service providers respond to a potential left-wing government coming into power with potentially increased regulation on the sector?
Caceis’ Lázaro continues: “These governments favour state-ownership of certain businesses, higher spending, greater powers to intervene in markets and are also more protectionist, all of which are causes of concern for many investors.”
The election in Argentina, South America’s second largest-economy, last year sent shockwaves across the region and beyond as far-right libertarian Javier Milei was elected president.
The election of Milei ‘immobilised’ the markets, MarketAxess’ Calderon explains. “So many times last year, we saw the markets completely paralyse. Nobody moved and nothing happened.” She freezes for effect before adding, “It was like crickets: nobody would say anything, nobody would do anything. Political instability has a tremendous impact on the markets.”
Despite this paralysed state, Calderon believes that the development of e-trading has changed the industry greatly.
Providing a platform
What could be described as fluctuating conditions for the markets in the region, MarketAxess’ Calderon believes the ability to trade electronically can mitigate volatility.
She explains: “For MarketAxess, whether it’s good or poor bad trading conditions, usually, we see inflows and outflows on our platform.
“The activity seen in Argentina following the election was very interesting, given the enormous outflows out of the country. It was our most actively traded sovereign on the platform, despite the volatility and despite trading like a distressed asset.”
Calderon argues that the region has benefited from the growth of electronic trading, and is catching up with North America and Europe. She says: “In the US and Europe they are now going into very complex protocols of automated portfolio trading, but the international markets are rapidly catching up. We had a record number of new clients in 2023 coming from the international markets, demonstrating that the word is spreading.”
On the other hand, Caceis’ Lázaro is more sceptical, stressing that electronic trading has not had as much impact “as other developed markets in the US and Europe. There is increased demand from local and international investors for e-trading access, driven by markets like Brazil and Mexico. This would provide greater liquidity and transparency through standardised trade reporting and increased access to data.”
The expansion of local markets remains a central focus for all three asset service providers.
From strength to strength?
BNP Paribas’ Calderon explains that “the merging of Colombia, Peru and Chile’s stock markets stands as a pivotal achievement for regional market growth. In 2023, the creation of the unified holding, NUAM, heralded a new era of opportunity.”
Calderon emphasises that this opportunity will only bring further optimism and build on the existing positivity in the region.
“Now the holding is crafting every aspect of this integration project, poised to unveil a seamless marketplace by the third quarter of 2025.”
On currency, “I think we’ll see a return in the hard currency side,” she says. “It was fully depressed last year and 2022. So I think we’ll start to see stabilisation of the hard currency valuations and and a comeback to the new issue markets.”
She returns once again to electronic trading and the growth of local markets, concluding that “I would expect for local markets to continue to grow in electronic trading and for the process to continue to speed up based on the protocols that we offer, on the liquidity that we offer, and the spreading of the word.”
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