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Global recovery will revive Latin America

Latin American markets should be a key beneficiary of the global economic recovery, says Ed Kuczma, Co-Manager of the BlackRock Latin American Investment Trust plc, even if there are still some reasons for caution.

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It has been a tough period for Latin America, with many countries hit hard by the COVID-19 crisis. However, it is possible to build a case for better times ahead for the region as the world rebuilds after the pandemic. It may be one of the most important beneficiaries of recovery in the global economy.

In common with many emerging markets, Latin America has struggled to manage the COVID-19 crisis. Population density, poor decision-making and inadequate healthcare facilities have all contributed to the weakness. Today, the region appears to be finally turning the tide, as the vaccine rollout builds momentum, but the human and economic cost has been significant.

As the region rebuilds, it will have some important tailwinds. Perhaps the most significant is rising commodity prices. Vast stimulus in the US and economic recovery across the world has pushed up demand for commodities after a period of tight supply. Global governments have ambitious, commodity-heavy infrastructure plans, particularly for green energy development.

Latin America is lightly represented in emerging market benchmarks and has generally been under-owned, so it only takes a small change in sentiment to have a significant impact.

Commodity-rich region

While the Latin American economy has notably diversified in recent years, the region is still commodity-rich and is benefiting from improving prices. In the portfolio, we have been focused on a number of key areas: lithium is a vital component in electric cars, while copper is widely used in renewable energy infrastructure; pulp and paper demand is growing as companies across the world re-stock and we are also bullish on Mexican cement producers, which are benefiting from strong US demand from the housing and infrastructure sectors.

Latin America is, in many cases, the lowest cost producer of these important commodities. It has relatively low labour costs and established extraction capacity. Commodities are high quality and abundant. As an example, the climate in Brazil allows a eucalyptus tree to grow to maturity in seven years. In Canada, the same growth takes 21 years.

There are also domestic factors that should support economic growth. Across Latin America, a growing middle class is fuelling domestic consumption and after a brief hiatus from the pandemic, this spending appears to be resuming. In Brazil, for example, record low interest rates continue to drive a growth in mortgages, auto sales and credit penetration.

Market-friendly reform

There is much to criticize in the way Brazilian leaders have handled the pandemic, but the economic reform agenda has remained largely intact. This continues to push for a market-friendly programme of privatisations and modernisation of the tax and the public service systems, which should increase levels of private investment.

Low interest rates and economic reform are being felt in markets. Latin American markets are diversifying and Brazil in particular, has a rich IPO pipeline. This is bringing new sectors and more choice for investors in the region. In the trust, we have exposure to structural growth themes in the region including healthcare, e-commerce and convenience stores.

Against this backdrop, we see anecdotal evidence that generalist emerging market managers are moving away from China – which has a lot of technology names – to more cyclical markets. Latin American markets, with their focus on materials, energy and financials, are a key beneficiary. Latin America is lightly represented in emerging market benchmarks and has generally been under-owned, so it only takes a small change in sentiment to have a significant impact.

That said, it is still a region that requires selectivity. It has its weak spots – political risk may rear its head again in Brazil with the presidential elections next year and countries may be left with higher debt level as a result of the crisis. Nevertheless, there is a lot of negativity already priced into markets and we believe that the future may be much brighter than investors are currently expecting.