Amid the recent revival for emerging markets, investors have remained focused on Asia. But should they be looking further afield to Latin America? Ed Kuczma, co-manager of the BlackRock Latin American Investment Trust, looks at the potential opportunities.
Investors have rediscovered their enthusiasm for emerging markets in recent months as the US has halted interest rate rises and the long-term strength of the Dollar looks in doubt. However, focus has remained firmly on the more obvious charms of Asia, where rapid GDP growth and technological innovation make it an obvious hunting ground for growth investors. Latin America, in contrast, has remained off the radar.
This has not stopped markets rising, with Brazil’s benchmark Bovespa index bouncing back in recent months. For investors, however, it shows that Brazil’s strengths are often hidden behind some lingering ideas about the country.
Latin America has long held some poor associations for investors – turbulent, left-wing politics and volatile markets. Democracy is relatively new in the region but we see real change, even if it can seem like two steps forward and one step back.
Equally, while parts of Latin America are growing strongly, this growth is not necessarily seen at the headline GDP level. If anything, GDP growth for Brazil and Mexico, the major markets in the region, looks subdued for an emerging market. Real GDP is forecast to be 2.4% in Brazil and 2.5% in Mexico for 20191.
This is ahead of recent years and encouraging – but is not the main reason to invest.
Instead, as stockpickers, we look for those sections of the economy experiencing long-term structural growth. Air transportation is a good example and growing at multiples of GDP in Brazil. From 2003 to 2010, when Luiz Inácio Lula da Silva was President of Brazil, air travel expanded rapidly from 37million per year in 2003 to 85million during his final year in power. This is being given new momentum by an influx of low-cost airlines into the country. There is a shift in the way people travel and as companies scale-up, they can decrease their fares. This creates opportunities for investors.
We see a similar picture in e-commerce. In the US, e-commerce has hit around 15-20% of overall retail sales. In Brazil, it is just 4% but the country is embracing the internet, with 130million Facebook users and 64million Instagram users. Over time, we believe it will continue to gain share, providing a tailwind to those retailers involved in the sector.
For Mexico, the picture is slightly different. Despite the wrangling over NAFTA (the North American Free Trade Agreement), Mexico remains tied to the US economy, which for the time being is a notable advantage as the US continues to grow faster than any other developed nation. If anything, we see these ties strengthening, which should improve Mexico’s position as a global manufacturing powerhouse.
While there has been a lot of fear around US-Mexican relations, Mexico benefits from having a low-cost labour force. It is linked to the US via robust supply chains and has an enviable infrastructure of highways, rivers and roads. Equally, while the election of the left-leaning current president Andrés Manuel López Obrador – aka AMLO – spooked markets, his emphasis on financial inclusion and improving credit penetration should create opportunities for investors.
In other words, each country within Latin America has exciting areas of growth but need to be hand-picked. The stock market tends to be dominated by the large global commodity stocks – fine if that is an investor’s choice, but it may not deliver access to the most dynamic areas across the region.
Since taking over the BlackRock Latin American Investment Trust earlier this year, we have adapted it to our approach. We draw macro factors into our approach by looking at four “Cs” – commodities, consumption, credit and currencies – and believe that analysing these four categories is the best way to build a coherent picture of the region’s growth and opportunities.
We undertake fundamental research on all the companies in which we invest. We want to find companies that are under-valued, under-owned and under-researched. This gives us an opportunity to capitalise on stock performance driven by earnings that beat consensus expectations and multiple re-ratings.
Politics and the macroeconomic situation are always considerations. Venezuela, for example, is not an area we would commit our investors’ capital. In Mexico, the current leftist government under AMLO is a headwind to growth, although his social programmes should improve spending. While this does not bar investment as it does in Venezuela, it does influence how and where we invest.
However, with notable exceptions, these macroeconomic considerations are never as important as finding the right companies on the right valuations. We will pass on even the best growth ideas if valuations are too rich, as they were with the Brazilian consumer sector more recently. Equally, Mexico has gone through periods of looking very cheap as investors were anxious about the situation with the US administration and that, too, can provide opportunities.
Latin America has come a long way but its charms are not always obvious. It is a market that suits a stock-picking approach, digging deep to find the real growth in an exciting region.
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