Emerging MarketsNov 15 2018

Does Latin America offer long-term investing prospects?

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Does Latin America offer long-term investing prospects?
Credit: Wolfgang Rattay/Reuters

Latin America has more than its fair share of economic and political scandals that regularly make global headlines.

But behind all the media noise, could the region offer long-term opportunities for investors?

It is worth looking at Latin America in the context of the wider emerging markets universe. For Aneeka Gupta, associate director for research at ETF provider WisdomTree, activity from outside this sector has adversely impacted the group.

By the end of September, the MSCI Emerging Markets index was down 7.86 per cent, compared to the MSCI World, which made a positive 5.43 per cent in the same time frame. 

“Concern over US trade policies have dragged on emerging markets in general,” notes Ms Gupta, “but investors are getting used to how the White House conducts its business and have started to ignore the tweets. They realise a deal will get done, but that it will take time.”

The political situation in Latin America is always complicated.Xavier Hovasse

Ms Gupta believes emerging markets will rebound, relying significantly on strong fundamentals, but for the moment Latin America is the “weak link in the chain”.

Over the last 10 years, to the end of September, the MSCI EM Latin America index made a barely positive 0.94 per cent on an annualised basis compared to the general emerging market index, which made 5.76 per cent.

In that time, some of the largest economies in the region suffered political mismanagement leading to financial collapse, compounded in Argentina by the worst drought in 50 years hitting exports by up to $6bn. Smaller economies, such as Uruguay, Ecuador and Paraguay, have such limited and illiquid opportunities, they are not classed by MSCI as either frontier or emerging markets. 

Additionally, there is very little economic cooperation across the region, according to experts, leaving struggling countries isolated. 

“The political situation in Latin America is always complicated,” says Xavier Hovasse, manager of the Carmignac Emerging Discovery fund.

Recent scandals in Brazil have left its valuations the lowest in the emerging markets, with investors staying away. The incoming president Jair Bolsonaro has seen his speeches generally well received by markets, but no one really knows what will happen when he takes office, according to Mr Hovasse. 

“What happened in Venezuela was a disaster for the people who invested there, but it was no surprise,” he adds, citing hyperinflation that has driven millions of its citizens to seek economic refuge in neighbouring states. 

Commodity curse

Much of this political mismanagement can be traced back to the region’s abundance of commodities, which, according to Mr Hovasse are “a curse”. 

“When a country does not have any [commodities], its people have to try and survive, so they innovate and develop manufacturing to boost exports – look at China, Vietnam, South Korea,” he points out.

“When you have commodities, not only does the economy rely on them, but it promotes corruption, and the impact on a currency can make the rest of the economy worse.” 

However, there are positive signs on the horizon that are not related to commodities.

The International Monetary Fund boosted its bailout to Argentina in September, just a few months after MSCI had brought it back into the emerging markets index, potentially welcoming more investors.

Additionally, the big positive for the region is its demographics, which according to Mr Hovasse are “very, very good”. 

“The fertility rate in the region is 2.1, which is just about perfect as it means women’s participation in the labour market is higher, education rates are better – this is coming together to make a demographic transition,” he explains. “Another thing investors like about the region, is that bosses maintain their companies in a way they would have them do so.

"They take on debt to increase their return on equity – in China, 60 per cent of all company capital is held in cash.” 

Green shoots

International technology companies are beginning to look to the area, too, with Asian giants recently investing hundreds of millions of dollars into local start-ups. 

But for Ms Gupta, the tech sector – along with the region’s commodities giants – are a touch too volatile for most investors. 

“A positive for the region is that due to the very low valuations, its risk/return profile offers better value than others, especially with green shoots on the political horizon,” she says. “It is tough to lose out when starting from this low a base.”

In the long term, there is opportunity in the region, according to Mr Hovasse, but investors should avoid looking at the economic cycle as a guide as political movements and external factors can influence it. 

“Emerging market investors are opportunistic so when momentum does start to pick up, it might be tricky to get in,” notes Ms Gupta. 

Elizabeth Pfeuti is a freelance journalist