Missing the best investment spots south of Havana?


Investment experts always talk about the importance of having a globally diversified portfolio, but parts of the world often go unnoticed.

One is Latin America, a vast area spanning 33 countries that has had more than its share of struggles, but can offer great opportunities for courageous investors.

Ed Kuczma, co-director of BlackRock Latin American Investment Trust, believes the region “could be one of the biggest beneficiaries of the recovery as the world rebuilds itself from the pandemic.”

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Latin America is one of the most abundant regions in the world in raw materials such as iron ore and copper. As the world recovers, the demand for these materials is increasing and benefiting producers in the region.

“The broad stimulus measures in the United States and the economic recovery around the world have driven up demand for raw materials after a period of supply shortages,” Kuczma said. “Governments around the world have ambitious, commodity-driven infrastructure plans, especially for green energy development.”

Domestic spending in many Latin American countries is also on the rise, which Kuczma says should benefit businesses in the region. “Across Latin America, a growing middle class is fueling domestic consumption and after a brief hiatus from the pandemic, spending appears to be picking up,” he adds.

Latin American countries have gone through a difficult period in recent years with political conflicts and a terrible response to Covid-19. Poor environmental performance is also a key issue.

As a result, the company’s values ​​are depressed and some experts believe they are undervalued.

Dzmitry Lipski, head of fund research at the wealth management platform Interactive Investor, said: “Valuations remain relatively attractive compared to broader emerging and developed markets.” He adds that in June, the S&P rating agency raised its forecast for economic growth in major Latin American economies from 4.9% to 5.9% next year.

Where are the opportunities for investors?

Latin America is a huge region, accounting for 13% of the world’s land area and 9% of the world’s population.

All of this will not present opportunities for investors.

Jason Hollands is Managing Director of the wealth platform Tilney Bestinvest. He says: “Although there are over 30 countries in Latin America and the Caribbean, most are totally uninvested from a public procurement perspective.

Hollands says there are six investment markets: Brazil, Mexico, Argentina, Chile, Colombia and Peru.

“Even here it’s really a two-horse race, with Brazilian companies accounting for 65% of Latin America’s shares and Mexico just under 24%,” he adds.

Eduardo Figueiredo, Latin American investment manager at Aberdeen Standard Investments, believes that these countries in particular have potential.

“Brazil is benefiting from an acceleration in economic activity, a healthy current account and a favorable outlook for raw materials,” he said. “Mexico enjoys strong support from the rebound in manufacturing activity in the United States.”

Beware of the region’s market volatility

However, investing in Latin America is not for the faint of heart.

Figueiredo admits that the region has a “notorious reputation for political instability, endemic corruption and periodic crisis, which manifests itself in very high levels of stock market and currency volatility”. Brazil in particular has struggled in recent years. Juliet Schooling Latter, head of research at fund scrutineer Chelsea Financial, said that although the country’s equities had a strong second quarter, “this comes after a prolonged period of underperformance relative to other emerging markets.” .

“Brazil’s mismanagement of Covid has been exacerbated by the worst drought it has seen in nearly 100 years, so the current government is very unpopular,” she adds.

Finding the right businesses is essential in a region with such difficulties, adds Figueiredo, and there could be more political instability on the horizon.

However, he believes that by focusing on quality stocks and investing in well-run companies with healthy finances, investors can benefit from a Latin American recovery while avoiding some of the risk.

Why emerging market funds may be the answer

Due to the volatility in the region, an investment should only be a small part of a well-diversified global portfolio. Investors in global passive funds will already have a small exposure to Latin America. For many, this will be enough.

However, for those who have confidence in the region and feel that it may be undervalued, an active global fund or an emerging market fund with a higher weighting to Latin America may be a good option, or else a fund dedicated to investments in 33 countries.

According to Schooling Latter, ASI Latin American Equity is its preferred fund in the region. Shares are up 18% in one year, mirroring the recent rebound in Latin America, but are down 4% over three years. More than half of the fund’s investments are in Brazil, with Mexico being the second largest component and nearly 6% in Chile. Only a small percentage is invested in Peru.

The fund’s largest holding is Vale, a mining company that produces the largest amount of nickel and iron ore in the world. It is also investing in the Mexican subsidiary of grocery giant Walmart, which is expected to benefit the country’s emerging middle class. Lipski prefers to invest in Latin America through emerging market funds, which allow managers to adjust their exposure in response to political volatility in the region.

He likes JPMorgan Emerging Markets Trust and Utilico Emerging Markets Trust, which have returned 47% and 17% respectively over the past three years. He also notes Mobius Investment Trust, which was launched just under three years ago.

The JPMorgan trust counts Argentina-based e-commerce giant Mercado Libre among its top holdings, while Utilico holds Brazilian generator set Alupar and Brazilian logistics conglomerate Simpar in its top ten.

Hollands likes the Aubrey Global Emerging Market Opportunities fund, of which 7.9 percent is invested in Brazilian companies.

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