The most important elements of Latin American capital markets are low liquidity and high dependency on the U.S. capital markets. Latin American capital markets are quite recent in comparison with its North American or European equivalents, but have experienced a significant growth in the past decade. One of the most important reasons for such growth was the control of inflation, which was particularly a problem in Brazil and imposed a heavy burden on its economic development. For the past twelve years inflation has been under control in Brazil and it is no longer a problem. Another relevant factor was the political stability and a more favorable approach towards foreign investments. These major changes, allied with an era of global economic growth and excessive liquidity in the international markets, created the right environment for the development of Latin American capital markets.
Latin American capital and financial markets benefited heavily from a great influx of foreign capital, which comprised foreign direct investments and portfolio investment. However, this development of Latin American capital markets was also somewhat hindered by the concurrent expansion of North American or European capital markets. With a global favorable environment for listings and IPOs (initial public offerings), many players opted to assess the foreign capital markets using Depositary Receipts (DRs). By adopting this tactic, the companies sought a more mature market, with higher liquidity of the stock exchange and deeper penetration in the international capital markets. This caused a migration of market liquidity from the home country of the company to the country in which the DRs were traded.
Evidently, not only the international conjuncture mentioned above created the right environment for the development of capital markets. Economics, politics and regulation also had a decisive role. As mentioned above, most countries in the region experienced control of inflation, political stability and openness to foreign capital. Some countries like Brazil, Argentina and Chile, also passed laws and regulations to specifically foster their domestic capital markets.
More recently, and in light of the international economic crisis, some important issues are emerging. As the capital and financial markets went through an impressive downturn, with very strong repatriation of foreign capital and listed companies losing market value, we are seeing an increase in shareholders class actions against the companies and their management. Another trend, but only for those companies that remain capitalized, is the purchase of their own stock (taking advantage of the relatively low prices of the shares) and/or the purchase of strategic assets with undervaluated prices.
The crisis also entailed liquidity problems, rating downgrades, economic recession, unemployment, insolvency and defaults of all sorts. Therefore, based on the experience of our legal practice at Azevedo Sette Advogados in Brazil we believe the areas that will see most activity in 2009/2010 are related to restructuring, M&A, insolvency, credit recovery and litigation.