INSIDE VIEW: On their radar

The Mexico Stock Exchange is seeking to join the integrated stock exchanges of Chile, Colombia and Peru, known as Mila. Philippe Carré, of SunGard, discusses the latest developments.

Brazil has been the darling of the investment community for some time. A stable, liberal democracy in a region historically plagued by military coups and quasi-permanent bloody civil warfare, it is different.

It benefits from a lack of ethnic issues, stable borders, no religious conflicts and a mildly interventionist government that has favoured the emergence of a burgeoning middle class with money to spend.

To facilitate investment flows, the Brazil Stock Exchange BM&F Bovespa has updated and invested heavily in its technology to attract new clients, new listings and ensure that Brazil has a world class exchange befitting its “Bric club” affiliation.

However, investors are looking further as doubts over the sustainability of Brazil’s growth arise, coupled with increased protectionism and the need for vast investment in infrastructure in order to further exploit the country’s natural wealth.

The immediate beneficiaries appear to be Mexico and the Mila countries, created by the connection of the stock exchanges of Bogotá (Colombia), Lima (Peru) and Santiago de Chile in Chile.

Despite its internal security turmoil, Mexico is attracting renewed interest from asset managers who see the potential for any growth in the US to flow straight to one of its largest trading partners. It is considered less vulnerable to external shocks because it is intricately and extensively linked to the US economic performance. It is expected even medium growth in the US will benefit Mexico.

A number of changes are taking place within the Mexican economy that will lead to changes in capital markets. Mexican companies have been investing north of the border, largely out of the strength of the Mexican economy, which is founded on a deep industrial base and less on commodities extraction and exploitation.

Mexican and international firms will leverage local growth to extract value for further investment. This is not a phenomenon restricted to local companies: Banco Santander plans to list its Mexican subsidiary on the Bolsa Mexicana de Valores (BMV), the Mexico Stock Exchange. This would be one of the country’s largest ever initial public offerings.

Rumours abound about other international banking groups with strong positions in Mexico following that trend. The BMV, in turn, is investing in its technology to facilitate both equities and fixed income trading, following the blueprint created by its Brazilian counterpart. Similarly, it has also linked up with Chicago Mercantile Exchange to attract volume in derivatives trading.

The Mila bloc is also turning investors’ heads away from Brazil. As each country slowly emerges from its relative obscurity, the global investment community is beginning to target them in search of new alpha creation opportunities and higher returns.

While these are small economies at different points of economic maturity, their ambitions to carve a niche for themselves by creating a regional alliance are starting to bear fruit in marketing terms, even if it has yet to translate in heightened trading volumes.

By creating the Mila alliance, they have put themselves on the radar for a lot of large international banks and brokers that would not have otherwise considered that region because it’s too far away, too small or too closed off.

Mila offers tremendous opportunities to local brokers and investors as well. Many domestic players within Latin America will need to expand regionally. One will find Brazilian financial firms that want to invest regionally because their own market is knocking at Mila’s door – and the same goes for Mexican financial institutions, as BMV seeks to rejoin Mila.

With further economic integration, Mila could allow brokers from each jurisdiction to trade freely under their own name in the other markets. It is a single market in the making.

Historically, Brazil and Mexico have led the way in terms of connectivity, but it remains relatively complicated. Firms need to understand local specificities about trading, opening accounts and repatriation of profits, to name just a few issues.

Often, reliable partners for technology and broking can help. And that is also bringing new opportunities to these countries; for many companies overseas are looking at Latin America as the next source of demand to get connected.

Philippe Carré is global head of connectivity for SunGard’s capital markets business

©2012 funds global



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