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Southern stars

British investors have largely missed out on one of the world’s great bull runs during the last five years – Latin America. Is it too late to invest in the region?

Citigroup figures show that Argentina’s stockmarket is up by 23.5 per cent in the year to date, Brazil by 21.2 per cent, Colombia by 15.4 per cent and Peru by 8.4 per cent. Around the world, only Morocco, which is up by 30.9 per cent, beats Argentina.By way of comparison, the UK is down by 5.5 per cent and the US is down by 4.9 per cent.

According to Hargreaves Lansdown, some of the best-performing retail funds during the past five years have been those exposed wholly to Latin America. Threadneedle Latin American C1 leapt by 461.25 per cent, Invesco Perpetual Latin American by 514 per cent, F&C Latin American equity 2 by 438 per cent and Scottish Widows Latin American A by 489 per cent.

Compare those stellar performances with IMA UK all companies (up by 83.12 per cent over the five years), HSBC Greater China Inc (up by 141.34 per cent) and IMA North America (up by 28.95 per cent) and you can see why the focus is back on Latin America.

Dr Mark Mobius, emerging markets fund manager and managing director of Franklin Temple-ton, believes the next 30 years could belong to Latin America in the same way that the past 30 years have been dominated by the rise of Asia.

He says: “This could very easily happen, partic-ularly if US foreign policy becomes much more realistic and looks at where its strengths lie and if America begins to take foreign policy initiatives in Latin America.”

Mobius says Latin America has two main advantages. First, a population that throughout much of the region speaks just one language – Spanish – helping to create a single market and, second, amazing natural resources.

He says: “There is no other continent in the world quite like this one. More or less, all of Latin America has a similar cultural identity. That is a huge advantage. China and India are vast markets but even in those countries there are very strong regional dialects.”

Many UK retail fund managers pulled the plug on Latin America funds at the turn of the decade as there was not sufficient investor appetite for them.

However, since that time, international conditions have turned markedly in the region’s favour. Furthermore, the main countries in the region have demonstrated an economic competence that most commentators 10 years ago thought would be beyond them.

Latin America does very well when commodities, especially soft commodities, perform well as it is one of the planet’s great bread baskets.

Brazil is the world’s second-biggest exporter of soya beans and Argentina is the third-biggest exporter (the US is number one). The price of soya has jumped by 150 per cent during the past five years.

The continent is also important for cereal production and prices are up by 181 per cent over the same period.

Latin America’s economic growth has averaged 4.7 per cent during the past five years. Three major countries in the region – Brazil, Chile and Argentina – have twin budget and trade surpluses while Colombia almost does and Mexico has a fiscal surplus.

Central banks have built up sizeable US dollar reserves – Brazil at US$195bn and Argentina at US$49bn. Inflation is largely under control in most of the region although not in Argentina, where local economists estimate it at 25 per cent.

Gartmore emerging markets desk head Chris Palmer says: “We make no secret of the fact that our global emerging markets funds are overweight in LatAm. The region has witnessed solid economic growth and is seeing an historic record of stability. Exports from the region have risen dramatically as Asia demands metals and agricultural products from LatAm.

“We also view LatAm as a way to hedge against global inflation and rising commodity prices because it is one of the regions that benefits the most from high commodity prices.”

Palmer is particularly bullish about Brazil, which is seeing the emergence of a new middle class. In addition to the commodity-producing sectors, retail, construction and financial services are also performing well and are benefiting from strong domestic demand.

He is also encouraged by Mexico, where President Felipe Calderón is rejecting populist pressures and could be about to deregulate the country’s oil and gas industry.

In April, Standard & Poor’s became the first major credit rating agency to assign Brazil an investment grade. Fitch followed suit in May and Moody’s indicates it could do the same if Brazil reins in its public spending further. Fitch’s move was important as many institutional funds will only consider investing in a country after two rating agencies have awarded it an investment grade. Brazil’s bond markets especially are expecting a new wave of investment.

In April, Fitch also upgraded Peru to investment grade. Chile has had the status for more than a decade and Mexico got it in 2000. Colombia and Uruguay are also expected to make the grade although both have to continue with macroeconomic reform and will probably not secure it until next year.

Argentina is a long way from achieving a rating because of its high inflation and weak institutions.

Simon Lue-Fong, Pictet Asset Management’s manager of its US$100m LatAm local currency debt fund, says: “Around 40 to 50 per cent of our regional bond fund is weighted towards Brazil. We believe that the economic and political outlook for that country in particular looks very good. The country is one of the few in the region with positive real interest rates and it has a strong central bank that specifically targets inflation. Inflationary pressures there are better contained than in many other countries.”

Lue-Fong says JP Morgan’s Government Bond Index Emerging Markets LatAm index is his main point of reference. This shows a strong positive correlation to commodity prices and on average it has risen by 17 per cent a year since 2002 (although in US dollar terms it is already up by 10 per cent this year).

He says: “Fixed income is obviously a very different animal from equities. Our fund gives investors some exposure to the commodity scene. If you were very bullish about commodities, you may want to invest in LatAm equities directly but for those who are a bit more cautious, our fund is a good option. Its volatility is very low.

“It also has local currency exposure. Although Brazil has tried to keep the real weak and has built up huge US dollar reserves in the process, we believe that the authorities cannot beat market fundamentals in the medium term and that flows will continue in Brazil’s direction, leading to the real’s appreciation.”

Latin America has come a long way during the past decade. During the 20th Century, its financial markets were among the most volatile in the world. However, many LatAm countries now seem to have learned lessons from the past and arranged their economies so that they are far less vulnerable to external shocks.

For now, LatAm also seems decoupled from the sub-prime crisis and the economic downturn in the US and Europe, apart from Mexico which exports 80 per cent of its goods to the US.

However, the region could be susceptible to a drop in commodity prices, especially if China is forced to cool down its economy. The country’s inflation is topping 8.5 per cent and there are indications that the government must bring economic growth below 10 per cent.

Hargreaves Lansdown head of research Mark Dampier says: “LatAm funds have performed very well during the past five years. Obviously, the best time to have got in would have been five years ago. I would advise people to go a bit easy now, to be a bit cautious. It is not inconceivable that Latin America will continue rising strongly but recently I have become concerned that commodity prices could be becoming a bubble.”

The long-term fundamentals remain in LatAm’s favour. Land will not only feed the world’s people, it will also become one of the world’s biggest sources of energy. The region also has some of the planet’s biggest supplies of fresh water.

Retail investors could benefit from some exposure to this promise, even if it is through a diversified GEM equities fund which is overweight in LatAm or through a Latin American fixed-income fund.

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