Investment Guide 2009

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    In the midst of the mighty shock caused by the international crisis, especially in relationship with future expectations, the investors must keep making decisions about their capitals. As a matter of fact, the discussion has gone beyond the future possibilities of financial markets, but also some economic sectors such as the car industry, the real estate industry, technology and consumer goods. Therefore a closer look to the investment universe available is needed, and especially to the essential considerations for survival and success in 2009. First of all we have to consider that the governments of more developed countries began the implementation of rescue plans to keep economies afloat and re-stabilize markets.

    Surely these protectionist measures might generate a positive impact in the short run, because it increases confidence and nonetheless delay the recovery process of the global economy. This is because such plans tend to reduce imports of goods and services in favour of internal production, generating deficits in their commercial partners. Between those commercial partners that are affected, is Latin America, case that has in general terms experiment a noteworthy reduction in its exports, especially in those countries producers of raw materials, which in the past were benefited with a price and spending bonanza in the international market. As it was to expect, Central America has also seen the effect of these decisions generated in the first world economy and that have diminished its expectations in the short and middle run.

    Before this reality, the investors must keep adopting strategies of investment that allow to maintain its profit sense at short run, and the growth of its investments in the long run. The previous fact obliges one to take heed and much attention to those markets with the capacity to recover faster in a medium run, and in that way overcome the bolded tendency to a low margin that keeps manifesting since September last year, when affected by the world crisis.

    RECOVERY EXPECTATIONS In the case of North America, the recovery of the markets will depend much on the application of the plan that Barack Obama has proposed and which there have been some criticism for too much optimism and little details. Anyhow, the markets seem to react positively about this optimism, but we cannot look over the wave of layoffs, the negative results of the companies and the reduction of operations and investments in foreign countries, all that will keep the economy contracted for at least a couple more years. The European case presents a similar pattern, since the diminishment of consumer activity in the US affects significantly the exports and thereby weakens the market. Maybe, the strengthening of the economy in the past and the expansion of the companies towards emerging countries, might impulse a faster recovery.

    Additionally, the political processes that have risen in some Latin American countries have placed the region in a higher level of risk than perceived in the past. Besides the previous thoughts, there exists a positive fact to consider and it is that the region has much more room to develop its markets than more advanced economies , specially at a lower cost and for that reason, the recovery perspective could be much more promising. Particularly for those economies more sound and open as Chile, Brazil, Colombia, Panamá and Costa Rica. In the case of the last one it will depend a great deal with the efforts done to develop the CAFTA.

    OPTIONS FOR INVESTMENT FOR 2009 2009 presents itself as a hard year to manage due to the uncertainty that comes with the crisis, reason for the investors to search for alternatives aimed at maintaining growth and profitability of its portfolios.

    This obliges one to be much more aggressive in the type of instruments to invest. As a matter of fact, it is very possible that we have to consider a bit more risk than was thought about in the past. The Costa Rican market has four major areas available for investors: First, there is the money market, in which repurchasing instruments (repos), currency and CDs, both in the national currency as in dollars or Euros are traded. Secondly we have the financial market, where the short term instruments, investment funds, securities and other instruments are traded. Following we have the exchange market, mostly devoted to fixed income securities (government and corporate), both in short as in long term in colones and other currencies and stocks which represent a small and shallow portion of the market. Finally, the fourth sector of investment is the Real Estate industry, where a series of options from housing solutions for low and medium income groups of population, to higher income housing and business developments suitable to foreign investment are found. Possibly this last one will be the one with greater pressure due to the general situation of the housing market in the international perspective. To be able to sail safely in the rough seas of 2009, we have to think in terms of inflation, the worst enemy of investment portfolios.

    In the case of Costa Rica, this variable has increased in a meaningful way and in accordance with the World Bank’s estimations, it is expected to sustain itself as one of the region’s highest for this year. So now the question arises, are there factors that indicate that in the country there can be an increase of money supply? Of course there is.

    Costa Rica is planning to ask the International Monetary Fund 750 million dollars to strengthen the economy, which will imply that there might be an injection of more resources in the financial system to stimulate credit, which definitively means more money in the street. We have to take into consideration that the basic deposit rate has been increasing, which in turn will increase lending rates, decelerating the economic growth, for which definitively 2009 presents itself as an inflationary year. On the other hand, we have to consider that the country presents a negative balance of payments, since it depends strongly on foreign direct investment to finance the level of goods and services imports, the economy consumes. This investment has been diminishing since the last quarter of 2007, which implies that the amount of resources the economy will get through the capital account is estimated to decrease around a 25%.

    This situation represents a risk for the investors in local currency, since the decrease of resources might imply an increase in the exchange rate, originating a devaluation of the currency, reason for which the investment in colones might carry additional losses to those perceived by the effect of inflation. This fact obliges one to search for securities or financial instruments which could be able to surpass primarily the estimate value for inflation in the medium run, and the subsequent devaluation of the exchange rate, therefore the investment in hard currencies (dollars, euros), has much relevance in 2009. As indicated previously, the local market is overflow with fixed income instruments that traditionally are not flexible enough with variations in the exchange rates which means that its ability to adjust to inflationary increases is low. Nonetheless, there are some options in dollars, especially in funds and sovereign titles (bonos).

    One of the positive aspects of the local banking system is its dedication to the financial intermediation, thus if in your investment strategy there is an option to run into debt, maybe you can get some benefits due to the resources inflow that would have at least the public banks by the Government and the private from the future issuance of subordinated debt by the financial institutions.

    INTEREST RATES IN DOLLARS VS. COLONES Due to the strong inflationary acceleration registered in the last years, the ability of the banking system to compensate this variable has decreased considerably, producing what is known as real negative rates. This means inflation in higher than the rates offered by banks therefore, occurring a loss in value of the investment and the buying capacity.

    Even, the rates in dollars offered by the banking system, when translated to colones don’t allow compensating the strong acceleration the prices had in 2008. Anyhow, this investments must have the devaluation rate added, that in average has been placed between a 7 and 8% in the last years. Due to this the investors can obtain a better result by changing its positions from colones to dollars, and investing in deposit certificates in dollars and then returning to colones. Definitely if your investment strategy contemplates the participation in the banking market, the deposits in dollars are the best option. Besides the average six months rate in dollars in offered by the local banks placed around 4,77% annually. A deposit certificate in a US bank at a similar terms receives an average of 1,75% annually, which makes it for investors much more interesting than investing money in those instruments in the national market.

    THE BANKING MARKET In Costa Rica, this market has the particularity that it is mainly of “reportos” (repos), since around 85% of the daily volume traded in the National Stock Market, corresponds to these instruments, which are none other than the interchange of securities between individuals with a promise of returning in a future time. For the professional investor this is an excellent way to manage its excess of cash flow, with interesting returns in the short run in both colones and dollars. A company can obtain near between a 5 to 8% in 30 days in dollars, and a10-13% in colones in a term of ten to less days.

    Nevertheless this market can be very sensitive to existing liquidity in the market, the latter understood either as the amount of available securities fund to trade, which can increase the premium to be paid in the operation or simply decrease the ability to fullfill it, which means a loss for investors; or liquidity can be understood as a lack of funds in the market, which limits the possibility to obtain securities, which definitely will decrease the possibility to obtain profit and of course the ability to carry on with this options. Maybe a good idea to improve the portfolio diversification is to consider going for “reportos” on structured foreign notes, that might work for nearly a 6% rate in a 10 days operation, especially on notes structured with Latin American sovereign debt such as Brasil, Colombia or Chile. Nevertheless the investor also needs to consider that investing money in Latin American debt has its risks, due to the policies adopted by some of the issuers and its performance in the market. The most used indicator for establishing a reference parameter is the Sovereign Risk which measures the interest spread between a Latin American Bond versus one of a more stable risk such as a 30 year bond emitted by the North American treasury.

    In the case of Latin America the Morgan Stanley’s Emerging Markets Bond Index (EMBI) is the standard. This market represents about 16% of the total negotiated in the National Stock Market, and besides the amount of instruments existing, if we maintain the premise that for surviving the crisis the best is that return able to surpass at least the inflation, debt securities doesn’t present options of considerable interest, with some exceptions. As a matter of fact the Yield Curve in colones that shows the returns an investor would get if the security is held at expiration, shows a tendency to invert itself. That is to say that the returns obtained for holding the assets in the short run are better than those of the long run, thus the decision to invest is concentrated in maximizing the profit in the short run rather than to engage with investments in larger terms. In the actual context this might have plenty of sense, but in the long run investors possibly are more interested in other instruments that allow to maintain a growth in its investments.

    When analysing the yield curves for debt securities in dollars and for sovereign debt, we observe that the tendencies are different, which is a clear evidence that in the long term investors will be much better if investing in long term dollar securities. The debt in dollars presents a better distribution of its returns. Nevertheless its sensibility to price changes by variations of the interest rate is much greater than its counterpart in colones, which makes it more suitable for investors able to assimilate decreases or increases of price. This means more ability to assume losses. Analysing the foresaid situation with more detail, we can compare a bond issued in colones with an expiration in 2017 with another issued in dollars and the same expiration, we will observe that in average the coupon of the first is placed around a 9%, while the second one is placed near an 8%, that when translated in colones represents an 18% of retunr which confirms the initial perception.

    What merits to add at this point is that the change sensibility in the price of the securities in dollars for this expiration is much greater than the one in colones, which indicates that the attraction of these instruments is more related to the stability it has in long term in comparison with the ones emitted in dollars, than for its return. The decision for the investor should be based in purpose of its profile and strategy, for that if we pursue to minimize the effect of devaluation and the inflation, then the option of debt in dollars of long term might be the most attractive, and that if on the contrary you have a more conservative profile, the debt in colones is the best option. Anyhow we have to consider that the investment in colones has its risks such as devaluation, as commented earlier. The investors would have an additional option: to consider the sovereign debt; that is the one emitted by the Government in the international markets, generally un dollars.

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