Latin America’s stockmarkets provided very positive returns for investors from 2003 to 2007, rising with other emerging markets until the sub-prime debacle in the US caused a global financial crisis and a collapse in risk appetite. But has there been fundamental change in the region or was this period of market strength simply driven by abundant global liquidity?
We believe that there are a number of developments across Latin America which, when taken together, suggest that the region is in a virtuous cycle which should propel growth over the long term.
The key positive for Latin America is the increasing number of quality listed companies available that meet our investment criteria. A significant expansion in the investment universe has occurred over the last few years driven by a wave of initial public offerings, particularly in 2006 and 2007. Some of these companies, such as WEG, America Latina Logistica and Grupo Modelo, possess long track records by which we can judge management.
The investment case for Latin America is underpinned by broader economic developments. There has been substantial improvement in macro-economic management across the region. Budget deficits and interest rates have dropped substantially over the last decade.
The emergence of Brazil as an economic powerhouse is an important feature of the last decade and sustains our positive view of the region. This has been driven by the government of President Lula which has delivered sensible economic management.
Despite a history of debt binges, Latin America does not share the present high levels of consumer indebtedness of developed countries. Banks are in a much healthier condition, with credit penetration low compared with other regions. Private credit to GDP is significantly below other emerging markets in Eastern Europe and Asia.
There are, of course, risks associated with investment in the region. Political instability has always been the bane of the Latin American equity investor. It is worth remembering that the region experienced 50 political revolutions in the 1930s. However, in recent years, democracy has spread throughout Latin America and put down relatively strong roots.
Corruption continues to be a concern and drug-related crime remains a significant problem, especially in Colombia and Mexico. Latin America is still one of the most socially divided areas of the world, with high levels of poverty.
A particular problem in some countries has been persuading potential tax-payers to hand their money over to the government. Mexico’s tax revenue was below 15 per cent of GDP in 2007 and the Latin American average only 17 per cent.
The region still suffers from an over-reliance on commodities. Oil and gas, iron ore and copper remain very significant exports.
Nevertheless, we believe that Latin America is in the early stages of a long-term growth trajectory. Increasing numbers of quality companies, many outside the resource sectors, offer attractive opportunities from a bottom-up perspective. For those who are willing to apply a disciplined investment philosophy focused on quality companies, the returns should be very positive over the long term.
Jonathan Asante is senior portfolio manager at First State InvestmentsLetters to the editor extra