InvestmentsAug 4 2016

Best in Class: LatAm stocks up and running

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Best in Class: LatAm stocks up and running

The 2016 Olympic Games are just 4 days away and the eyes of the world are on Brazil.

Having had a torrid time in the past five years or so, the Brazilian stockmarket seems to have turned a corner and is up more than 31 per cent in local currency terms and 77 per cent in sterling terms year to date.

So what has caused the turnaround, and can it continue? One of my favoured funds in this area is Aberdeen Latin American Equity, run by Devan Kaloo and team. They believe the dramatic improvement in sentiment has been driven by a combination of political developments in Brazil, slightly higher global risk appetite and a rebound in commodities.

A more optimistic outlook for the political situation in particular, as well as the prospects of lower interest rates and inflation, has led to a rebound in the banking and consumer sectors.

Of course, the risks haven’t gone away. But there is at least now the possibility of some economic and market-friendly reforms and, with valuations coming from such depressed levels versus the rest of the world, there could well be more upside to come.

With a summer rate hike in the US now looking unlikely and the oil price, and other commodities, looking to have stabilised, the short-term outlook is more promising than it has been for some time.

Elsewhere in the region, Mexico has a muted outlook, despite the economy expanding by 2.6 per cent in the first quarter of the year. However, the federal government appears to be making the right moves to meet its fiscal targets, cutting spending and maintaining budget austerity.

The Aberdeen fund has around 57 per cent in Brazil, 23 per cent in Mexico and 10 per cent in Chile. It also has a large focus on both the financial and consumer sectors across the region, which has had a positive impact on returns this year.

The team has been investing in Latin America since the 1980s and has run dedicated mandates in the region since the early 2000s. The firm also has an office in São Paulo, where four members of the team are now based.

As per the investment philosophy with all Aberdeen’s emerging market funds, the team carries out proprietary research into each stock, and never invests in a company without having first met the management. The stock selection process focuses on quality and price. One of the quality filters is past treatment of minority shareholders, which is particularly relevant in emerging markets – especially those with infamously protected economies and heavily state-owned enterprises, such as Brazil.

Members of the team aim to visit the companies in their portfolio at least once a year, conduct an in-depth review of their quarterly or interim results and discuss all large price movements and newsflow for companies at weekly meetings. Once they find a good company, they invest for the long term.

If you believe we have reached a bottom in the commodity cycle, and that the dollar has peaked against emerging market currencies, Latin America could be a good play and investors in the region could be rewarded. With valuations as low as they are still, it’s certainly worthy of further consideration.

Darius McDermott is managing director of FundCalibre