BLACKROCK LATIN AMERICAN INVESTMENT TRUST PLC

Latin America: discovering new growth

Latin American markets have been hit hard by the Coronavirus outbreak. However, says Ed Kuczma, Co-Manager of the BlackRock Latin American Investment Trust plc, there may be opportunities amid the gloom.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

In common with the rest of the world, the coronavirus outbreak is putting a major dent in Latin American economic growth. Markets have already seen significant falls and there may be further volatility ahead. The question for investors is whether markets fully reflect the economic impact. If they do, this may represent an opportunity for longer term investors.

Latin American markets always tend to suffer at times when global growth is under threat. Part of the problem is one of perception. Latin America tends to be seen as tied to the fortunes of the global economy, a legacy of its history as a commodities producer for the world and particularly to China. China has made up a significant part of the demand for Latin American commodities and its weakness threatens demand.

Undoubtedly, this still has some truth to it. China is a major destination for products from Latin America’s largest economies. It remains the primary trading partner for Brazil, Chile and Peru1. Its economy has been hit by the Coronavirus outbreak and there may be further weakness ahead. However, there are two things to bear in mind. Firstly, the impact of the outbreak on China may ultimately be less than it is for the rest of the world as it went into and is coming out of the crisis first as economic activity shows continued signs of normalisation. Secondly, Latin American economies have diversified, and this should mitigate the impact of these difficult conditions.

Although China has been the epicenter of the crisis, it has now substantially emerged from it and life is getting back to normal. We are seeing some signs of Chinese economy normalising and the authorities supporting the local activity. The Asian Development Bank predicts growth of 2.2%2 across Asian economies in 2020. This is substantially below initial estimates of 5.5% growth, but higher than for other major economies such as the US and Eurozone2. Growth in Asia is expected to rebound to 6.2% in 20212. Asia’s trading partners will benefit, and Latin America should be among them.

More important for long-term investors is the increasing breadth of Latin American economies

A wealth of commodities

More important for long-term investors is the increasing breadth of Latin American economies. This diversification is both within the commodities sector and outside it. Brazil’s economy, for example, is diversified across various commodities – covering the agriculture, metals and energy sectors3. While demand for metals may ebb and flow with economic growth (growing economies tend to spend more on infrastructure development, for example), the same cannot be said for coffee, cotton or wheat where demand is more stable3.

Mexico’s main export commodity is oil, but it only makes up around 10% of its exports – areas such as car manufacturing and electrical equipment are far more important for its economy4. These sectors are undoubtedly feeling short-term pain, but unlike restaurants or leisure, this is spending that is likely to be deferred rather than cancelled. Longer term, Mexico may ultimately benefit from supply chains moving out of Asia. 

Domestic consumption and technology

The growth of the domestic consumer has been a major driver of the Brazilian and Mexican economies in recent years. Within our portfolio, we hold a Mexican drinks and retail company, which incorporates both the largest independent Coca-Cola bottling group in the world and the largest convenience store chain in Mexico. We also have the domestic branches of major international shopping brands, such as Walmart.

Technology is another major area of growth. Internet use continues to expand in Brazil – over the past year, 8.5 million more Brazilians gained access to the internet, a growth of 6.0% in comparison year on year5. Today, more than 150 million out of the country’s nearly 212 million inhabitants are internet users5. There are 140m active social media users in Brazil – rising at around 8% per year5.

Active investment

As active investors, we are in a good position to reflect these emerging economic trends in our portfolio. While commodities still make up some of the major holdings in the index, our trust has the flexibility to move away from the index, uncovering new opportunities and finding tomorrow’s areas of growth.

These are now priced much more competitively. Although our share price has been hit hard in this difficult period, as an investment trust, we have not been forced to sell to meet redemptions. We have been able to take advantage of falling market prices to add to favoured holdings.

This has been a painful time for investors, and we don’t pretend to know when it will be over, or the likely impact. However, we believe much of the potential economic pain is now reflected in share prices across Latin America and we are finding plenty of new opportunities. Valuations are at historical lows, stock markets and currencies have corrected heavily and we believe Latin American equities offer attractive entry points for long-term investors.

The specific companies identified and described above do not represent all of the companies purchased or sold, and no assumptions should be made that the companies identified and discussed were or will be profitable.

1Americas Quarterly, February 2020
2Asian Development Bank, April 2020
3Americas Quarterly, April 2020
4The Balance, November 2019
5Pag Brasil, February 2020

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