"...emerging markets will grow faster than the
developed world for decades to come."

Gideon Rachman, The Financial Times

Latin American markets are standing on their own feet

Latin American markets appear to have taken a potent dose of cold medication, as the region now appears to be immune to catching a cold when the U.S. sneezes. This situation dispels the decades-old axiom that the fortunes of Latin America are tied to those of its largest trading partner.

The outlook for the region is positive, with several nations presenting interesting opportunities for clients seeking growth

“The region is quite different from what it was 20 years ago,” says Serge Pépin, vice president, investment strategy, with BMO Global Asset Management in Toronto. In particular, he suggests, most Latin American countries have learned from their past experiences – for instance, the 1994 Mexican peso crisis, which had a “tequila effect” across the region – and “have now got their act together.”

To put the region’s new-found resilience in perspective, Pépin contends: “It came out of the 2008-09 global financial crisis much quicker and stronger [than the more developed regions].” And although growth in Latin American markets has not returned to pre-crisis levels, it’s still relatively strong.

New York-based Standard & Poor’s Financial Services LLC‘s (S&P) April 23 report on the region forecasts Latin America will grow by 3.2% this year and by 3.4% in 2014, in spite of “some deterioration in the outlook for advanced economies – mainly those in Europe.”

Traditionally, investors have approached Latin American markets with caution because they have had a history of financial and political turmoil. Although the region’s equities markets remain high risk/high reward plays, its fledgling sovereign- and corporate-debt markets have emerged as being among the highest-yielding in the world, making them attractive to yield-hungry clients in the prevailing low-interest rate global environment.

Latin America’s growth has been accompanied by massive investments in infrastructure and foreign investment, and a rapidly rising middle class and a younger demographic that are fueling domestic consumption. In fact, according to the Washington, D.C.-based Institute of International Finance Inc., a global association of financial services institutions, total capital inflows into Latin America are expected to reach US$321 billion in 2013 and US$326 billion in 2014, up from about US$304 billion in 2012.

David Kunselman, senior portfolio manager with Mississauga, Ont.-based Excel Investment Counsel Inc., credits Latin America’s turnaround to more responsible fiscal and monetary policies in most countries in the region, which have led to declining public debt levels and more controlled inflation. “Historically, Latin American countries were net borrowers and had high levels of public debt,” Kunselman says. “But, today, they are net creditors and have declining public debt.”

And although high inflation has been endemic to the region, S&P forecasts average inflation in the region will be a relatively healthy 6.6% for 2013 and 6.8% for 2014.

Latin American governments also have fostered trade liberalization, integrating the region into the global economy, Kunselman contends, and instituted banking and financial services sector reforms, which have resulted in greater availability of credit domestically, expanding capital markets and broader access to capital for corporations.

Government coffers in the resources-rich region also have benefited from the strong demand for commodities, mainly from China and, to a lesser extent, India, says Jeff Feng, vice president of Toronto-based Invesco Canada Ltd.‘s Trimark Investments division and portfolio manager of both Trimark International Companies Fund and Trimark Emerging Markets Class fund.

The positive developments in Latin America have resulted in S&P awarding six countries in the region – Brazil, Chile, Colombia, Mexico, Panama and Peru – investment-grade status with stable to positive outlooks (vs the junk ratings they had slightly more than a decade earlier).

Although the prospects for Latin America as a whole are improving, Pépin cautions: “Not all countries [in the region] have been created equal.” For example, he says, Venezuela is a big question mark; Argentina remains a political risk; and Bolivia is the last dictatorship in the region. “But for the most part,” he adds, “the region is much more stable.”

Here is a closer look at some of the countries in the region:

– Brazil. Pépin likes Brazil’s infrastructure, transportation, utilities and telecommunications sectors. He believes that substantial investments will be made to improve the country’s infrastructure in time for the World Cup of Soccer in 2014 and the Summer Olympics in 2016, both of which will be hosted by Brazil.

Among the potential beneficiaries of investments in infrastructure, suggests Pépin, will be CCR SA, a holding company with interests in private interstate-highway concessions; Telefonica Brasil, a subsidiary of the Spain-based telecommunications giant, Telefonica SA; and Companhia Energetica de Sao Paulo, one of Brazil’s largest power generators.

Feng argues that Brazil is no longer the darling of Latin America: “[Its] expansion momentum is slowing.” Brazil’s existing infrastructure – including roadways, ports, airports and highways – is a bottleneck to growth, he adds, and the country is suffering from an uncompetitive labour force, high wages and low productivity.

However, Feng says, Brazil will continue to benefit from consumer-led growth and the export of resources-based and food-related commodities.

Kunselman predicts Brazil’s “economic growth should begin accelerating in the second half of the year, given the huge amount of monetary and fiscal easing we have seen over the past 12 months.”

– Chile. This country is a utilities play, Pépin says, and he likes water-utility company Aguas Andinas, Chile’s largest sewerage and potable-water firm.

But, Feng contends, although Chile is perhaps the most stable Latin American country, it is not friendly to foreign investments and could be hurt if China’s demand for copper, Chile’s largest export, drops – especially with more new capacity coming onstream.

Kunselman, for his part, argues: “The most dynamic component of domestic demand in Chile is gross capital formation, especially in the mining sector.” He also favours financial services and retail, both of which have benefited from the strength of domestic demand; and construction, primarily in subsectors related to the development of new mining projects.

– Colombia. Pépin prefers Ecopetrol, the country’s largest and primary petroleum company.

As for Feng, he says Colombia “has come a long way [and] confidence is returning.” In particular, the government has “fixed political violence [and] drug cartels are under control.” He favours consumer staples in this country.

– Mexico. This country looks to be the most promising, Feng says: “It has regained its competitiveness in manufacturing from China, which is experiencing rising wages, and also has a big advantage by being closer to the U.S. and a part of [the North American Free Trade Agreement].”

In particular, Feng likes the consumer-related sectors, which are benefiting from greater spending power; and the financial services sector, “which is finally on its feet” as a result of local banks being more prudent in their lending.

Kunselman focuses on the property, energy and infrastructure sectors, believing they offer strong secular growth and are direct beneficiaries of current reforms.

Pépin also prefers the consumer sector and banks in Mexico. In particular, he likes Grupo Herdez SAB de CV, Mexico’s foremost prepared-food company; and Grupo Financiero Bonarte SAB de CV, which provides banking and other financial services.

– Peru. This nation is challenged politically, Feng says, but the government is willing to promote foreign investing. He is cautiously optimistic about Peru’s economy, which is commodities-driven, and favours the consumer sector, which he claims is undervalued.

Pépin prefers the financial services sector and favours Credicorp, the largest financial holding company in Peru.

Peru has been a favorite market for Kunselman, but, he adds: “Its relatively small investment universe limits any absolute exposure to the country.”

Despite the overall positive outlook for the region, Latin American markets have performed relatively poorly on average in the years following the mid-1990s. The MSCI Latin America index had a small loss of about 0.58% in U.S.-dollar terms for the year-to-date period ended April 30. However, there is consensus that the region’s equities markets will recover in the second half of this year.

Arguably, Latin America’s future still is tied to the U.S. and Europe, which absorb a substantial portion of exports. But domestic demand also is increasing, reducing the risk associated with dependence on major trading partners. Pépin cautions that if oil prices fall below US$70 a barrel and commodities prices weaken further, the region would be hurt.

Governments in the region, Kunselman says, need to maintain effective policies to deal with inflation, currency appreciation, current account deficits and overheating, now under control.

Otherwise, Feng adds, slipping into “old habits” is a major risk.

Dwarka Lakhan

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.


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