Strong growth in Latin America is catching the eye of many business and investors. But when it comes to decision time, Brazil is often the only financial market big and sophisticated enough to make a trade worthwhile. However, three of Latin America's smaller but most dynamic economies plan to combine forces to offer a viable alternative and open up their markets to local and international investors.
Chile, Colombia and Peru have already begun the first phase of integration in a process that will eventually lead to direct trading on a common bourse. The Integrated Latin American Market, known under its Spanish acronym MILA, will unite 563 companies and have a total market capitalisation of US$647 billion, according to Bloomberg data. That would make it second only to Brazil's Bovespa in the region, relegating Mexico into third place. Trade volume is also set to be among the highest in the region, with initial estimates pointing to a daily sum of US$300 million.
The three Andean states make natural companions: they share a Pacific coastline, an economic model based on openness to trade, and democratic values. But individually, each market is too small to attract large sums of investment compared to the continent's economic and financial powerhouses.
By pooling liquidity and deepening capital markets, each of the countries should be better placed to compete for foreign investment with the region's traditional powerhouses, with Mexico the most likely to lose market share, according to Victor Hugo Rodriguez, CEO of LatAm Alternatives. This scale advantage applies especially to the two smaller markets in the MILA group, Peru and Colombia, which hope to gain more weight in regional indices.
As well as the obvious benefits of lower transaction costs and improved cross-border trade efficiencies, the combined market will allow investors to diversify their holdings. Where now most investors in Peru are concentrated in the booming mining sector, a portfolio in MILA could be expanded to include Chilean retailers and Colombian construction firms. Each individual market, especially Peru and Colombia, has traditionally been too small or risky for most investors, particularly foreign, to look beyond the countries' dominant industries.