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Lat Am: Light at the end of the tunnel

Lat Am: Light at the end of the tunnel

Scorching hot weather and a passion for football are two of the more common visions of Latin America, but in recent years, political and economic turmoil has engulfed the region. Although it is an area still very much in development, Latin America is rich in investment opportunities. But accompanying this are the inherent higher risks of emerging and frontier markets.

According to the Poverty and Equity Databank, Latin American countries have a combined population of 530m and as of 2012 more than 72m people were living in poverty – defined as earnings of less than $3.10 (£2.33) per day. Inhabitants are also highly urbanised, with 80 per cent living in cities. But good investment opportunities are not always the most obvious, and although the region has experienced turbulent economic conditions in recent years, a change appears to be in motion.

With global developments such as Brexit and events such as August’s Olympics Games in Rio, can Latin America continue this burst of growth or is it merely a short-term spike before more years of economic difficulty?

“Most of the challenges have taken place in the past five years with growth close to bottoming in the region,” says John Malloy, emerging markets manager at RWC Partners. He adds Latin American countries are likely to face individual challenges rather than collectively throughout the region. “In Brazil, the government needs to pass painful reforms in Congress to adjust fiscal policy, and in Colombia, higher interest rates could potentially affect growth in the short term.”

Brazil

The success of Brazil, South America’s largest economy, remains pivotal for investors looking for opportunities. Its economy shrank for the fifth consecutive quarter at the start of 2016 after contracting 0.3 per cent, plunging into the deepest recession the country has seen since the 1930s. This is expected to hit 4.3 per cent by the end of 2016 after experiencing a 5.4 per cent drop in 2015.

In addition to this, President Dilma Rousseff was removed from office pending an impeachment trial and many members of congress are facing alleged criminal or corruption charges, leaving the country in disarray.

Devaluation of the currency has only exasperated these concerns, as the real plummeted from 0.40 to 0.16 against sterling between 2010 and 2015. Whether Brazil’s economy has now hit rock bottom is a subject of debate. Experts suggest this occurred in 2015, only for further problems to unfold this year.

“In 2015, Brazil was utterly destroyed – particularly the currency. People thought there was a chance Brazil could end up in genuine mess rather than just being unattractive,” says Ewan Thompson, head of emerging markets at Neptune.

Emerging markets have struggled in the past few years after a blistering performance in the 2000s, and Mr Thompson explains that this was due to strong global growth and a commodity super cycle, driven by the emergence of China as a global force. “The best performers were any country producing commodities, and Brazil was one of the top performers during that period,” he says.

Olympics

Starting this month, arguably the world’s greatest sporting event will be held in a Latin American country for the first time. It is hoped that the Olympics will not only provide a boost to Brazilian infrastructure, but also drag the nation out of its longest recession since the 1930s. However, preparations have so far been hampered by the presidential issues and concerns about the Zika virus.