Still some upside left for financial markets

After a stellar rise from March’s lows, financial markets across Latin America have wobbled over the past week amid fears that a number of countries might follow Brazil’s lead and impose controls on capital inflows. High levels of global liquidity combined with the region’s comparatively good growth prospects mean that renewed gains in financial markets are likely in the near-term. But equity valuations are looking stretched in a number of countries (Peru) and some currencies (notably the Brazilian real) now appear overvalued compared to fundamentals. With the pace of economic recovery likely to fade over the second half of next year, and commodity prices and global risk appetite set to fall too, there is a good chance that asset prices will end 2010 lower than they start it.