This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Will Landers, senior portfolio manager of the BlackRock Latin American Investment Trust, explains why he believes Latin American equities continue to offer attractively strong returns.
Latin America continues to offer one of the most attractive equity investment opportunities given the solid top-down story of the region as well as the attractive and diversified array of companies looking at the market from a bottom-up perspective.
Whilst there are interesting stories throughout the region, such as infrastructure investments in Peru, growing energy and mining investments in Colombia and Chile’s stable economy, returns in 2013 will be determined by Brazil’s ability to grow again and Mexico’s ability to move forward with its reform programme.
Brazil
With a domestic recovery underway, Brazilian equities seem poised to recover in 2013. Record low interest rates for Brazil are just starting to have an impact on economic activity. Employment remains at record high levels, with wages growing in real terms and the minimum wage increasing by 9% from 1 January 2013; commodity prices, key to Brazil’s export economy, are forecast to be stable during 2013, with a growth bias should China post faster than expected growth rates; and many infrastructure projects are becoming realities.
In addition, the construction boom for the World Cup in 2014 and the Olympics in 2016 are in full swing as well as dozens of infrastructure and logistics projects that will improve Brazil’s competitiveness. Last, but certainly not least, Brazil continues to rank among the cheapest equity markets around the globe – a fact that should change if and when the country begins to deliver on growth once again. All of these together should be supportive of the domestic economy in Brazil in the coming year and may allow the country to deliver a growth rate around 3%.
Mexico
Looking at Mexico, the country’s equity market has benefitted from its proximity to the US economy and its status as a relative “safe haven” during periods of stress around global markets. In addition, and more importantly looking into 2013, Mexico has been able to surpass the market’s expectations for growth in the past couple of years despite lacklustre growth in the US. Mexico has been regaining competitiveness in the US market and this is likely to be a continuing improvement. Furthermore, there are great expectations that it will tackle significant energy reform during the second half of 2013, which could result in a major growth in investments in the country.
Chile
Chile continues to be one of the most stable countries from a top down perspective with low debt levels, a balanced budget and low gearing levels. President Piñera’s popularity and approval levels, which plummeted in 2011 due to pressure around education spending, remained low throughout 2012 despite strong GDP and employment figures. This year’s presidential elections should be a focus, although no significant changes to the country’s economic programme are expected.
The BlackRock Latin American Investment Trust portfolio is positioned to benefit from the improving environment in Latin America, especially in Brazil. Brazil continues to be the largest individual country position, both in absolute terms and relative to the benchmark. Exposure to Mexico is also larger than that of the benchmark. Domestic-related sectors, especially retail and infrastructure, continue to be favoured. Within materials, we prefer iron ore miners and pulp & paper producers over copper miners and steel producers, and have an underweight position in oil & gas.
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