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Latin American equity markets have bounced back strongly this year after being affected by the global recession, but it is important investors accept it is not a risk-free region, warns Invesco Perpetual’s Dean Newman.

The manager of the company’s £193m Latin American fund believes countries such as Brazil and Chile could still suffer from further seismic market shocks; a worse-than-expected slowdown; or prolonged strength of the dollar.

“It has been a great start to the year, the world looks a bit happier and there are plenty of long-term reasons why it is worth investing in this area,” he says. “However, we should not get too carried away.”

This can obviously be difficult at a time when Latin American equities have outperformed development markets due to a combination of fiscal stimulus packages, lower interest rates and the restructuring undertaken by many businesses.

In fact, Mr Newman believes the seeds of this most recent recovery were actually sown back in the early part of this decade when companies swollen with debt were forced to become more efficient and focus on cash flow generation.

“From 2003 to last year, we had a succession of years where Latin America produced very good absolute returns,” he says. “This achievement was due to a benign global economic backdrop and the fact they had taken some hard medicine.”

The overall aim of the fund, which was launched in November 1994 and has an A rating from Standard & Poor’s, is to achieve capital growth through primarily buying shares in South and Central America, as well as the Caribbean.

“When you invest in Latin America for the long term you are looking for companies that give you the opportunity for some strong earnings and dividend growth,” explains Mr Newman. “You then need to ask if you are paying the right price for it.”

The investment process guiding the fund is a continuous mix of top-down and bottom-up analysis. While understanding the economic backdrop of countries and sectors is important, time is also spent analysing individual stock names.

“Often people have a very neat way to explain their process, which is not necessarily what they do,” he points out. “Every day I'm asking myself if I'm in the right stocks and sectors, and whether I should have more invested in certain countries.”

Having confidence in the management teams, however, is essential. “You need a sense of whether you can believe and trust them,” he adds. “Over time you will get a sense of the consistency and reliability of the story they are telling.”

Brascan, a housebuilder in Brazil, is one such name that Mr Newman followed for a long time before becoming investing - after the sector was sold off on fears of higher interest rates and a weakening global economy.

“We felt it had become very cheap but was a proper business that had been around for a long time,” he recalls. “It also had a strong parent company that was prepared to put its hand in its pocket to back the business. This move has proved successful.”

Another is SLC Agricola which has bought significant chunks of agricultural land in Brazil to which it has applied modern farming methods. The fact it has access to capital also illustrates how Brazil has developed in recent years.

“Over the longer term Brazil has some fantastic advantages in this business, such as the possibility of getting two crops each year,” says Mr Newman. “The people running this business are also very experienced and it is going to be a winner.”

The longer-term active theme in the portfolio is helping the average person in the street enjoy a better life, which has prompted investment in consumer areas such as homebuilders, clothes retailers, software companies and even dental care providers.

Another is consolidation.

“For many years businesses had no access to capital because interest rates were very high and banks did not want to lend,” he explains. “Good companies that survived are now in a position to consolidate their sectors by making acquisitions.”

While most of Mr Newman’s active positions are taken at the sector level this obviously has a knock-on affect on countries too, which is why he is now modestly overweight Mexico and slightly underweight Chile.

“There are stocks in Mexico which have been really battered by prolonged bad news such as the weak economy and swine flu,” he says. “This gives me a chance to buy cheap companies, such as airport businesses, with good long-term prospects.”

The underweight stance in Chile, meanwhile, is principally due to better prospects elsewhere. “In many ways it is the best run economy in Latin America with some of the very best companies but it has already done well,” he explains. “We felt it was right to take advantage of cheaper opportunities elsewhere.”

While many of Mr Newman’s small and mid-cap names are now delivering, he concedes that this strategy hurt the portfolio last year, as did a failure to have enough exposure to the materials sector.

In particular, smaller stocks suffered from share price falls and the fact many relied on bridge financing which was an issue as the monetary environment tightened. The response was to reduce the number of holdings and scrutinise those that remained.

“We pushed companies on their balance sheet positions, cash flow generations and ongoing strategies,” he explains. “Repositioning to be more focused was correct and we have recently started to see small and mid-cap ideas starting to perform.”

Latin America may not be immune to future global difficulties, but Mr Newman believes it deserves a look. “There is a good long-term story but there is also volatility,” he says. “Trying to predict where we go from here is difficult but investors have the opportunity to get involved when there has been a bit of weakness.”

Rob Griffin is a freelance journalist