Emerging Markets  

Fund Review: Political change drives LatAm turnaround

Fund Review: Political change drives LatAm turnaround
 Performance of Latin American indices in the past 12 months

High-profile political and economic issues, combined with the decline of the commodity supercycle, may have caused some investors to overlook Latin America when considering emerging or frontier market exposure. 

Research from the McKinsey Global Institute – ‘Where will Latin America’s growth come from?’ – notes that in the past 15 years the region’s economies have posted average annual GDP growth of roughly 3 per cent. This is above the growth rates of most developed economies, but slightly behind emerging markets such as China, South Asia and sub-Saharan Africa. 

But there are substantial differences within the region, with economies such as Bolivia, Colombia, Ecuador, and Peru delivering the strongest growth, while the likes of Brazil, Argentina and Venezuela have struggled. 

Investment performance shows an alternative picture, with the MSCI Brazil index gaining 74.4 per cent in sterling terms in the year to April 5 2017, while the MSCI Colombia climbed just 32.2 per cent, data from FE Analytics shows. 

Will Landers, manager of the BlackRock Latin American investment trust, suggests political change is one of the main drivers behind the turnaround in these markets. “Outdated populist policies are being replaced by market-friendly governments focused on a reform agenda that should result in improving growth dynamics across the region,” he says. 

“Brazil is driving much of the narrative. [Dilma] Rousseff’s ousting in August 2016 was a turning point for the country. The leader’s term in office saw a decline in productivity and increased state interference in key industrial sectors. But under successor Michel Temer, we have seen a 180-degree turn in financial policies, getting Brazil back to the basics of the successful real plan, with fiscal responsibility and monetary stability under a low-inflation environment.”

Elsewhere, Claudia Calich, manager of the M&G Emerging Markets Bond fund, points out growth is expected to be positive in Latin America, except in Venezuela, while monetary policy in the region will remain divergent with more interest rate hikes in Mexico and accommodative monetary policy in Brazil. 

Ms Calich continues: “Argentina’s recent successful return to the sovereign bond market is a positive step for normalising the country’s financial relations with the international markets. President Mauricio Macri’s administration continues on the right path of reforms, with moves towards more orthodox economic policies.”

Mr Landers adds: “Peru is another country in the region benefiting from political change. The election of Pedro Pablo Kuczynski in July 2016 has seen a rejuvenation of key mining and infrastructure projects.”

But there remain some headwinds, notably in terms of exports to the US given the protectionist stance of Donald Trump. Didier Saint-Georges, managing director at Carmignac, says: “While Latin America has enjoyed a recent period of growth, the political changes in the US, the region’s main trade and investment partner, left many questioning whether local markets can still perform well.”

Ms Calich adds: “Mexico could be one of the few developing economies to register a growth slowdown for the year ahead, given uncertainties such as the future direction of the North American Free Trade Agreement under a Trump presidency.”