InvestmentsMay 20 2016

Insight: Latin America

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Insight: Latin America

Brazil

Brazil, in particular, has been held in high esteem as the largest economy in Central and South America and is one of the Bric countries (along with Russia, India and China). It is preparing to host the Olympics and Paralympics this year, which will boost tourism. But despite that, the country has been going through a tough few months.

President Dilma Rousseff has been suspended for the course of her impeachment trial on charges of illegally manipulating government accounts. She has denied the charges, stating she has not done anything that was not already common practice in previous administrations. She has been suspended for 180 days while the trial goes on, and Brazil’s vice president, Michel Temer, is serving as interim president.

To make matters worse, Brazil’s stock market was one of the worst performers in 2015.

Venezuela

Venezuela has also been experiencing difficulties. Firstly, the IMF forecast at the start of the year that it expects the country’s consumer inflation rate to hit 720 per cent after it saw an estimated 275 per cent jump in 2015.

Additionally, its president, Nicolas Maduro, has threatened to seize closed factories and jail the owners. He has also introduced a nationwide state of emergency to “tend” to the country and to denounce any external and foreign “aggressions” against it. Thousands have signed a petition to remove Mr Maduro from office and activists have taken to the streets in protest.

Argentina

Meanwhile, Cristina Fernandez de Kirchner, the former president of Argentina, has been charged with defrauding the state. She is alleged to have manipulated the country’s central bank to sell dollars at an artificially low price before she left office. A judge in the trial has said the proceedings have cost the state about $5.2bn (£3.6bn).

Peru and Mexico

Peru also faces a challenging time as it seeks to avoid being downgraded to ‘frontier’ market status this year owing to a perceived shortage of investable companies.

Another major economy in the region is Mexico. Unlike many of its neighbours it has made a good start to 2016. Its GDP has expanded 2.7 per cent year-on-year based on the first quarter, and is up 0.8 per cent on the fourth quarter of 2015.

However, faced with so much uncertainty, the region as a whole does not appear a particularly safe place to invest in at the moment.

Table 1 provides a snapshot of fund performance in recent years. It illustrates the top 10 performing funds with more than 50 per cent exposure to Central and South American countries, according to FE data. The funds are arranged over five years and based on an initial £1,000 investment.

Unsurprisingly, funds across the continent have taken a hit when it comes to performance. Over five years, only one fund – the Pimco Emerging Markets Bond fund – would have produced a return on the initial investment, yielding £1,340 over the period. Investors in the next best fund – Stewart Investors Latin America – would have lost out, as the fund returned only £968 over the five years.

Even over one year, investors would have been disappointed. Pimco remains the highest-returning fund, but only three other funds have produced a positive return. The reason for Pimco’s performance may be that it invests in the continent’s debt, rather than in equities like many of the other funds. It largely invests in Central and Latin America, with almost 60 per cent of assets allocated to the region.

Chart 1 shows how the Pimco Global Emerging Markets Bond fund has performed against the Global Emerging Markets Bond sector over the year to 1 May. The chart indicates that, while the fund has underperformed at some points during the year, it has outperformed its peers and produced positive returns over the past few months.

Its highest stock holding in the area is Petrobras, the Brazilian petrol company. Although it is a fund manager favourite, the company has some of the largest debt of any company, and low oil prices around the globe have only made it worse. Its debt currently stands at an estimated $130bn (£90n). The company has also been caught up in a scandal caused by allegations of corrupt directors collaborating with Petrobras contractors to make money for themselves.

Few funds are specific to Latin America, but many have indirect exposure through a focus on broader emerging markets. If investors do not want exposure to countries that are going through awkward times, fund allocation must be properly looked at.

The region may not look promising at present, but many fund managers and analysts have predicted that it will turn around, and that next year we could see the return of profits on investment.

Five questions to ask:

1. Is it a broader emerging markets fund?

Look into the fund allocation because many emerging markets funds will have exposure to countries across the globe, and Latin America may be just a small part of it.

2. What currency is it denominated in?

This could affect the cost of the fund, and many Latin America-specific funds may be based in the US and held in dollars. This could make the fund more expensive for UK investors, and any currency fluctuations could also affect your return.

3. What risk does the fund hold?

Investing in any emerging market has its risks. At the moment, many countries pose political risks. Check the fund’s fact sheet and prospectus to see how it manages risk.

4. What are the charges like?

Depending on where the fund is domiciled, the average fund will typically sit in a range between 1.5 and 1.75 per cent. Every fund will be different, and some may be more expensive.

5. Can I invest through an investment trust?

Yes, although there are not as many funds with high allocation compared with unit trusts. Investment trusts may also have a slightly higher risk due to gearing, and can be more expensive.