LatAm benefits are still a draw, says Charlemagne’s Ian Simmons
Ian Simmons, lead portfolio adviser on Charlemagne’s Magna Latin American fund, believes the pillars supporting returns from the region are still strong.
Latin America is a proven hunting ground for alpha, outperforming emerging markets for eight of the past 11 years. It offers the three pillars of the emerging market growth story in one place: commodities, consumption and infrastructure.
Latin America is a huge source of raw materials, with high-quality reserves and some of the low-cost mines in the world. Brazil, alongside Uruguay and Paraguay, is also one of the few countries in the world that has large tracts of land still available for conversion into highly productive farmland.
Good-quality soil and favourable weather conditions mean such countries are ideally placed to benefit from growing demand for soft commodities as the global population continues to rise.
Latin America has redirected the wealth accumulated from its commodities effectively, boosting consumption and infrastructure as the other growth pillars. Brazil has a clear deadline in place, hosting the 2014 FIFA World Cup and the 2016 Rio Olympics. As expected, these events require heavy investment in stadia and hotels, in addition to transport networks, generating major opportunities for equity investors.
The challenge is to take a step back and recognise that these pillars of growth still exist, while picking the stocks best placed to benefit from them. Brazil continues to offer a good mix of fundamentals and valuations in the small to mid-cap space in areas such as education, healthcare, commercial property, insurance and retail, where state policy can be supportive.
In contrast, Mexico has several high-quality, high-return consumer staples, which give the market an overall defensive bent. Chile and Colombia are enjoying a positive economic backdrop, with both expected to post 5% GDP growth this year.
Stock markets across the Andean region are also well supported by domestic pension funds. Small and mid-cap ideas are also attractive in Mexico, though the market appears expensive given headline earnings multiples and the reduced upside seen in some of the larger stocks.
There are various top-down drivers at work there, with consumer confidence and credit markets recovering and its exchange rate the only cheap one in Latin America.
This has, for example, made it preferable for car manufacturers to build their plants in Mexico rather than China for selling into the US.
But Latin America is no longer as overtly cheap as it was 18 months ago. That said, this headline figure hides two extremes, with investors willing to pay record prices for the security of consumer staples such as Mexico’s Walmex. Areas such as banks and housebuilders are falling back to mid-crisis valuations.