Investment Trusts

Latin America: a region reinvigorated

Political change is proving impossible to ignore in Latin America. From the impeachment of Brazil’s President Dilma Rousseff in August to fiercely contested presidential elections in Peru, Argentina and Chile, there has been significant political and structural reform across the region. Yet far from destabilising the area, in some cases this new political blood appears to be reinvigorating markets. In the year to October 2016, the MSCI Emerging Markets Latin America Index reported returns of 32.05%, which compares favourably with 10.19% returned over the three years to October 20161.

BlackRock’s portfolio manager for Latin America, Will Landers, assesses the region’s potential for growth.

What’s driving the growth story in Latin America?

Brazil is driving much of the narrative. It’s often said that if Brazil isn’t working, Latin America isn’t working. President Rousseff’s ousting in August 2016 was a turning point for the country. The leader’s term in office saw a decline in productivity, increased state interference in key industrial sectors and, ultimately, allowed inflation to reach double digits while interest rates rose from 7.25% to 14.25%2. Under successor President Michel Temer, however, the economic policies of the Rousseff regime are starting to be reversed and opportunities begin to re-emerge.

What specifics can you point to for investors?

Inflation is now back in single figures and interest rates are expected to start falling this year and be down to single digits by the end of 2017. Along with greater fiscal responsibility, this will allow Brazil’s Central Bank to enter a prolonged period of monetary easing which means it can increase the supply of money to stimulate the economy. Greater investor and business confidence should result in an upturn in economic activity, which will allow unemployment to fall and the dynamic demographics – for example its young, upwardly mobile middle classes – that were driving Brazil’s growth forecasts in the early 2000s to regain momentum. Brazil is a country that exports very little of its GDP – 13% in 2015 according to the World Bank3 - so its domestic situation – rather than global trade – has a disproportionate impact on growth.

Which other Latin American countries have growth stories to tell?

Peru is another market in the region to benefit from political change. The election of President Pedro Pablo Kuczynski in July 2016 has seen a rejuvenation of key mining and infrastructure projects. Peru’s new president is a former financier who is keen to revive the country’s economic prospects and the country is already one of the world’s fastest growing economies4.

Are there any sectors that stand out?

Latin America has long been synonymous with commodities. The region doesn’t lack for natural resources, and mining and other associated industries remain critical in driving economies in this part of the world. Yet as oil prices fell worldwide in recent times, other sectors have risen to prominence in this part of the world. The banking sector, for example, has gained importance in Brazil, as have consumer staples. Electronics also looks set to fare well, given the purchasing power from a burgeoning middle class. In Mexico, too, the consumer discretionary sector is starting to grow.

What impact will the new US president have on the region?

It’s yet to become clear, but the election of Donald Trump as US president could have repercussions for Mexico. While retail sales continue to be very strong and air travel is growing, it is heavily dependent on the US for its long-term growth: US goods and services trade with Mexico totalled an estimated $583.6 billion in 20155.

But your overall feeling is positive?

Yes. For example, changes to the management board at Brazilian state-owned oil firm Petrobras could well improve the sector’s outlook. Meanwhile, in Argentina, President Mauricio Macri – a former civil engineer – has focused on reinvigorating the fossil fuels markets with a range of favourable economic policies. If you think about all the reasons why people were getting excited about Latin America seven to 10 years ago, a number of them have revived. We believe it is once again an attractive time to look at Latin America.

Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore the value of these investments may be unpredictable and subject to greater variation.

BlackRock has a wealth of experience in this region and can help you tap into this exciting growth story. For more information, visit here.

 


1MSCI, October 2016. See below for Annual Performance of the Index
2Bloomberg, January 2016
3The World Bank, October 2016
4The World Bank, September 2016
5The Office of the United States Trade Representation, October 2016

 

Annual performance (%) to last quarter end (GBP)30/09/15 - 30/09/1630/09/14 - 30/09/1530/09/13 - 30/09/1430/09/12 - 30/09/1330/09/11 - 30/09/12
MSCI Emerging Markets Latin America Index (GR) 50.46 -34.15 -0.85 -7.53 9.53

Past performance is not indicative of future results. It is not possible to invest directly into an index.

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