In search of the modern El Dorado

THE world has been watching South America. Yesterday saw the Brazilian presidential election, while Argentina has been surprised by the death of Néstor Kirchner – an event that, slightly worryingly, sparked a huge rally in the Argentinean stock market. More prominent still were the Chilean miners whose plight last month captivated millions. Given all that, it could be about time for spread betters to pay a little more attention. South America might not have the most accessible markets, but they are highly volatile, an aspect that ought to appeal to spread betters.

Brazil has been the region’s most exciting market for a while now. In the first half of 2010, the Brazilian economy grew at an annualised rate of 8.9 per cent. Rising commodity prices, a growing middle class and more stable macroeconomic management all make Brazil a much more interesting prospect than it once was. Much remains in doubt, however, about the policies that the new government is likely to adopt.

As City A.M. went to press last night, Dilma Rousseff of the Workers’ Party (PT) was the favourite candidate to win. According to Standard Chartered analysts, the main concern is that while her government may extend some pro-market policies, tax cuts and fiscal consolidation are unlikely. Due to the uncertainty, stock markets are likely to react strongly to government appointments over the next month or so, offering scope for a well informed spread-better to make a profit.

Few providers offer the Brazilian index to spread betters, but one that does is Capital Spreads. It offers a spread of 60 points on the Bovespa, the main Brazilian index, which trades between 12:00 and 20:10, UK time. Another option is to trade the many European and American companies with significant exposure to South American economies. Brazilian revenues probably pushed Volvo back into the black, for example. AlphaValue, an equities research firm, has compiled a list of multinationals that get over 15 per cent of their revenues from Brazil, and there are many to choose from.

Alternatively, traders might want to consider South-American firms listed on the New York or London stock exchanges. For Argentina, that might be the best proxy available to spread betters. A long history of destructive economic populism has prevented the country from taking off in quite the way Brazil has managed, but Argentina should benefit from surging food prices, and some think reform is on the horizon. Several large Argentinean companies are listed on the NYSE; one decent opportunity might be Banco Macro – the country’s second largest private bank.

Indeed, as Guido Stiel of Allianz RCM points out, banking and other consumer services across the region are probably especially likely to do well, thanks to buoyant middle class consumption. What matters is whether the politicians will allow that growth to continue. In South American politics, nothing is ever guaranteed, but at the moment, things at least look hopeful. For the more ambitious spread better, the region might well prove to be a new El Dorado.