An investor in Latin American equities would have more than doubled their money over the last five years. If they had invested in global equities, they would have made a little under 10 per cent.Could the same happen again?
There is no doubting that the Latin American economy is now enjoying the fruits of its restraint during the last boom cycle – a solid fiscal and monetary backdrop, a well capitalised banking system, marketand economically-friendly reforms and the improved welfare of its citizens.
indeed, as markets struggle to decide whether austerity or stimulus is the right solution to the issues facing developed economies today, Latin America offers an increasingly attractive outlook to investors.
It is the region’s richness of natural resources that initially tends to capture investors’ attention. Commodities are an important structural driver of the regional investment thesis, with materials and energy the main export-led sectors, making up around 40 per cent of the regional equity market.
The rapid inventory rebuild seen across the global economy since the autumn of 2008 has translated into higher demand for raw materials which has, in turn, boosted the local economy and driven stock prices higher.
However, Latin America is more than just a commodity story. We believe the domestic consumer and financial sectors are attractive investment propositions within the region right now. Rising GDP per capita, low and growing market penetration for these businesses, increasing employment rates and structurally declining interest rates all form a strong backdrop for domestic growth.
Those financials that can benefit from domestic penetration growth across the entire spectrum of the market stand to do well. However, more specifically, alongside benign demographics, the region is experiencing evolutionary changes in credit markets in terms of both accessibility and improved terms.
As recently as 2003, the average annual interest rate for a vehicle loan was typically 55 per cent and the duration of the loan was typically 18-24 months. These are incredibly harsh compared with Western developed norms. This made consumer credit almost impossible to attain, leaving most Latin American countries to operate as cash economies. Recent changes have seen historically low interest rates in Brazil and Mexico make credit increasingly affordable.
In Peru, where we see a number of attractive stocks, market penetration is even lower than in its neighbours and its economy is expected to grow in excess of 6 per cent this year, thereby providing each of its four major banks with fantastic prospects, while benefiting from little meaningful competition in the country.
In the consumer discretionary sector, stocks that are benefiting from the growing buying power of the local consumer look interesting, such as the low-cost housebuilders that are generating strong revenues from a government-backed homebuilding program.
None of these investments comes without risk but the risks currently facing Latin America are largely external in nature, such as a slowing global economy, which could result in declining trade, shrinking capital flows and weaker commodity prices.
Within the region itself, Brazil’s election race is also important to note as the regional powerhouse chooses a successor to president Lula da Silva, although the winner is unlikely to depart from the current administration’s market-friendly policies. Mexico’s drug war is still a concern while, in Peru, mining conflicts could become an issue for president Alan Garcia.
Nevertheless, Latin America has certainly come a long way over the last five years. It is unlikely that investors will double their money over the next half decade but there are some good indicators of further growth to come.
Alex Duffy is portfolio manager for Latin American equities at Fidelity International