What Can Capital Markets in Latin America Learn from Europe for Their Growth?

Having suffered a 6.8% gross domestic product (GDP) contraction in 2020, Latin Amercian markets are starting to recover as global investors once again return. The International Monetary Fund is forecasting a real GDP growth of 6.3% for 2021. Also the IPO activity in the region had been buoyant. Whereas before, foreign investors overwhelmingly focused their attention on emerging APAC businesses. Latin American companies are now beginning to attract greater interest. This was the verdict of the speakers at the Financial News’ Future of Latin America webcast in December 2021 – Javier Hernani, CEO BME and Head Securities Services at SIX, among them.

According to White & Case, the region saw 55 IPOs raise 15.17 billion US dollars in the first nine months of 2021, corresponding to a 41% increase on 2020. The majority of IPOs took place in Brazil with the country accounting for all but five of the region’s listings. Although Latin American countries are  registering high GDP figures and rising investor participation in their local markets, Hernani said the region had scope for further growth.

Efforts to stimulate foreign investment in Latin America are underway, continued Hernani. “We have to generate more awareness about the investment opportunities available in Latin America, and this is something which BME has been doing for some time through its Latibex market, an international market for Latin American securities.”. Alongside Latibex, SIX – via BME – is currently working on an initiative to make reference data on Latin American securities more easily accessible for global investors (see Box).

Market infrastructure reforms are also playing a critical role in driving inward investment. After previously operating a split market, Brazil’s Cetip and BM&FBovespa consolidated their official and OTC trading venues to create a single market infrastructure known as B3. Similarly, the stock exchanges of Colombia, Chile, and Peru agreed in November 2021 to merge into a regional holding company – becoming the second largest bourse in Latin America. Through increased financial markets infrastructures consolidation, it will become easier for global investors to participate in these local markets –  thereby facilitating greater liquidity.

Although Latin America has traditionally been a strong commodity market, ESG (environment, social, governance) investing in the region is gathering momentum, said Hernani. While Latin America’s share of the 3 trillion US dollar ESG debt market is very small, issuances of GSS (green, social, sustainability and sustainability-linked) bonds reached 45 billion US dollars in July 2021, or 1.7 times what was issued in the whole of 2020. As issuances of GSS bonds pick up in Latin America, it is likely that further investor inflows will follow.

One of the biggest impediments precluding wider investment in Latin America, explained Hernani, was the absence of a common currency.  He said that Spain’s decision to join the euro, for example, was critical in shaping its capital markets and mitigating currency risks, yet this option of a shared currency is not available in Latin America.

Furthermore, he added market participants operating in the EU are subject to harmonized regulatory frameworks – which makes it easier to invest in the region. This is in marked contrast to Latin America.  While a handful of countries – including Chile, Colombia, Mexico, and Peru – did try and launch a connectivity scheme joining up their respective equity markets, the initiative is not succeeding due to regulatory arbitrages between the participating jurisdictions. Such issues need resolving if inflows are to pick up.

Although Latin America does not have a joined-up capital market like the EU, the region is maturing evidenced by the rising number of IPOs, increased consolidation among financial market infrastructures and the emergence of ESG investing.