December 24, 2008
The global financial crisis has reversed the typical relationship between Central America/Caribbean credit and the bigger LatAm economies, which are beating the former on a returns basis. CentAm/Caribbean has historically been a diversifier that outperforms in a bear market and underperforms the rest of the region when markets go up. However the JPMorgan CACI index, which tracks CentAm/Caribbean sovereign and corporate credit, is down 18.7% in the year to December 18 on a USD total returns basis. This compares to a loss of 12.1% during the same period for the EMBIG, which tracks the bigger sovereigns. “The market is upside down. It’s not really fundamentals driving the market, it’s technicals,” Franco Uccelli, a VP for strategy in the LatAm research group, tells LatinFinance. “Once the market goes back to normal, we’ll return back to the normal trading performance of Central America and the Caribbean,” he adds. According to the analyst, this temporary dislocation will likely not be corrected until mid-2009 or H2. In the year to date, CentAm/Caribbean corporates have lost 28.8% and sovereigns declined 17.0%, according to the CACI. Grenada is down 51.9%, Belize off 46.0% and DomRep dropped 42.6%. The best performers were Costa Rica (-2.7%), Barbados (-6.9%) and Trinidad & Tobago (-7.0%), amid a flight to quality. Despite 2008 losses, investors should still consider CentAm/Caribbean credit for its typically low beta performance and the fact that it is less correlated to the wider market. “It’s a nice way to diversify your investment portfolio,” says Uccelli. A leading gripe from the buyside is lack of liquidity, and the last two months have been thin, but there is improvement. “We’re starting to see some liquidity coming back . . . that’s a good sign,” says Uccelli. The CACI was up 7.55% last year and returned 12.63% in 2006.