The first five years of Latibex – the euro-denominated market for investing in Latin American companies that was created by the Madrid Stock Exchange – has confirmed its role as a faithful mirror of the region. Latibex has enormous growth potential, but many uncertainties and difficulties must be overcome if it is to really take off. Its greatest achievement has been its broad representation of Latin American stock exchanges. Its biggest drawback has been its shallow liquidity and lack of placements. Share prices are now recovering, after an initial crisis.


When Latibex was established on December 1, 1999, one of its main goals was to become a mirror – in euros – of the main Latin American stock exchanges. It would replicate the way Latin American markets moved, translated into euros. The goal was to make this market the simplest way for European investors to access Latin American markets.


When the Madrid Stock Exchange drew up its plans for Latibex, it probably never dreamed that it would wind up having so much in common with the region itself, for both good and bad. The replica has almost outdone the original; Latibex has become a sort of emerging market within developed markets. Offering eternal promise that is forever unfulfilled, it is a diamond in the rough that never winds up being polished.


A Difficult Beginning

Five years ago, when the concept was conceived, it attracted interest on the part of major investors as well as European stock exchanges. The exchanges were in the initial phase of what appeared to be an unstoppable process of consolidation. Ultimately, this led to the integration of the French, Belgian, Dutch and Portuguese exchanges in Euronext. There was also another major merger process involving the British and German exchanges (which wound up a failure). The intention was to join forces with the Madrid exchange, in large measure because Madrid had expressed a great deal of interest in Latibex during the summer of 2000.


Nevertheless, time was passing. The appeal of this new concept was dissolving like a cube of sugar in coffee. The condition of the market did not help. The dot-com bubble had just burst, and share prices were dropping like a rock. Risk aversion was becoming the dominant theme, and markets were no longer the center of attention.


As if that were not enough, the Argentina crisis erupted, leading to several changes in the country’s presidency and the suspension of its debt payments. Next, there was the global shock generated by the attacks of September 11. Finally, there was the enormous crisis of confidence involving Brazil in 2002, provoked by uncertainty about the impact of the victory of Lula in the presidential elections.


Latibex’s attractiveness declined because of the overall lack of interest in Latin American variable rate instruments.  And so, when Latibex was launched on December 1, 1999, only five companies were involved – Aracruz, Banco Santander Puerto Rico, BBVA Banco Francés, Río de la Plata and Probursa – compared with organizers’ original forecast of 20 firms. Meanwhile, capitalization reached only €4.9 billion, far below the forecasts.


As a result of all these factors, the FTSE Latibex All Share Index, which reflects price movements on shares quoted by Latibex, suffered a series of painful losses during its first three years. On September 30, 2002, the index reached an all-time low of 477.8, just before the Brazilian presidential election. At that point, the index was more than 50 percent below the 1,000 mark at which it began.


The Inflection Point

That turned out to be the inflection point. Over the last two years, the index has practically doubled in value, reaching 950 points. This rebound reflects the recovery of the main stock exchanges in the region, including Mexico and Brazil, where the benchmark indexes are now at historic highs.


On balance, what is the meaning of this roller coaster ride? “You can call it very positive, if you consider that Latin America has survived some very tough years, when investors viewed it as a complicated place that had enormous risks. But the last two years have been very positive,” notes Jorge Yzaguirre, associate professor at the Instituto de Empresa and the Carlos III University of Madrid.


One of its successes, says Yzaguirre, is that “it has achieved an extraordinary correlation of practically 99 percent with the behavior of Latin American markets. It is extremely representative, and the shares that comprise it have a capitalization of €160 billion, practically one-third of the Spanish market.” Yzaguirre is also a senior manager of Spanish Stock Exchanges and Markets, which owns Latibex. 


Currently, 34 stocks from seven different countries (Mexico, Brazil, Argentina, Chile, Peru, Panama, and Puerto Rico) are quoted on Latibex, including some of the largest companies in the continent, such as Telmex, América Móvil, Petrobras, Vale do Rio, and Bancomer. Three new companies have recently joined it: Sadia, the largest Brazilian food chain; and two Mexican companies that belong to the Salinas group – Grupo Elektra and TV Azteca.


These companies derive advantages from being quoted on Latibex, especially greater awareness among European investors. José Parés, director of investor relations for Mexico’s Modelo brewery, said that it was “very good” to be quoted on the Spanish market. In an interview with Expansión, the Spanish newspaper, he said, “Getting onto Latibex has allowed us to diversify our shareholders and reach both private and institutional investors.”


The Main Obstacles to a Take-off

Although Latibex has traveled a long road, much remains to be done. Pablo Rión, a Mexican financial analyst, says, “In Mexico, almost no one knows about this market, even though the major companies of the country are quoted there.” Currently, seven Mexican companies are quoted on Latibex. Rión believes that the country’s other large corporations will also wind up making the leap.


According to Jesús González Nieto, who is responsible for the project, one of the biggest problems for developing Latibex is its lack of liquidity. It is hard to do buy and sell quickly, while always providing good price pegs for transactions. To solve this problem, specialists have committed themselves to putting up a minimum balance of €20,000 per order, or €200,000 per day.


Yzaguirre notes that “measures are being taken to expand liquidity. For example, BBVA, which acts as a specialist, has committed itself to creating better pegs for prices. The idea is to enable investors to get better prices for these shares through Latibex, rather than by investing in the local markets themselves.”


Other measures have been enacted recently, including fee changes, exemptions from some fees, and getting Latin American stock market intermediaries involved in this market.


One of the most highly publicized measures has been the creation of the FTSE Latibex Top index, which brings together the 15 most liquid shares, in an attempt to become the “Euro Stoxx 50 of Latin America,” as Yzaguirre calls it. Since its launch on February 23, this index has risen by about 20 percent.


Practically before it was created, the index was used to create warrants. These derivatives permit investments at specific prices for a specific period; they allow investors to bet on a specific trend. They can lead to much higher returns on investment, but there is a risk of losing everything. The warrants on Latibex Top were the first to be launched on a negotiable index in Latin America. Derivative products indirectly lead to higher contract volume because very short-term investors usually employ a strategy that involves both sorts of products on an ongoing basis.


“The new derivative product is creating a culture for spreading the word about this market,” says Yzaguirre. The best could be about to come, with the creation of the Law of Collective Investment. Currently being developed in Spain, this would allow investments in exchange-traded funds (ETFs). “If regulations allow, launching a fund quoted on Latibex would be something very positive because it would permit people to invest in Latin America, the way they invest in shares of Telefónica,” says Yzaguirre.


These kinds of initiatives would lead to growth in contract volume, which is now at a low level. The amount of business done this year will reach barely €500 million, less than one-fifth of the volume that moves each day on the Spanish stock exchange. In any case, the volume of business continues to grow, year by year, from the €100 million transacted between December 1999 and the end of 2000.


According to Yzaguirre, “The key to a definitive take-off will be share placements. That sort of operation would have an enormous impact, and it would attract attention from investors. It could happen if a company realizes a privatization, or decides to carry out a part of such a deal in this market. The problem is that there are very few share offerings on Latin American exchanges.” Rión agrees, adding that “there are few placements nowadays, except for companies that have their own divisions [to handle such deals], which has been working very well in Mexico.”


At the moment, Latibex is proving to be of interest to some funds that invest in the region, because buying and selling in Latin American equity markets involves incurring much higher costs from foreign exchange transactions, hiring a local broker, and paying administrative costs in each specific market. The only thing missing now is for investors – above all, private investors who do two-thirds of the business – to cast their gaze on the markets of Latin America, which have bright prospects both in the medium and long term.