This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Tom Smith, Neptune Latin America Fund manager reviews 2012 and gives his outlook for Latin America.
2013 Review
Brazil: 2013 saw emerging markets buffeted by news from the Federal Reserve regarding the potential tapering of quantitative easing (QE). This caused weakness in equity markets and currencies through the summer, a strong rebound following the delay of tapering in September, before final weakness into year-end as US economic and employment data proved stronger-than-expected and worries over tapering re-emerged. Domestically we saw a shift to more orthodox monetary policy as interest rates rose steadily throughout the year in order to reduce inflation, which remains above target. Economic growth continued to rebound from the 2012 lows and we saw more auctions for airport and toll road concessions, helping to stimulate private investment.
Mexico: proved resilient within Latin America and the wider emerging markets as both its debt levels and current account deficit are lower, reducing vulnerability to external shocks. We continued to see impressive progress on the reform front with education, telecommunication, financial, fiscal, and electoral reform all approved and the energy reform expected to be approved in December. While not all reforms are positive for all sectors – telecommunication reform looks to increase competition and fiscal reform includes additional taxes on soft drinks and junk food – the complete reform package should lift Mexico’s potential GDP growth rates. Mexico’s economy will post growth of just 1.2-1.4% in 2013 as public spending has been weak and fiscal drag in the US was centred on the first half of 2013. However, we have seen acceleration in the fourth quarter as US manufacturing goes from strength to strength and public investment in Mexico has picked up, and we expect a much stronger performance in 2014. Having been the top performing regional market in 2012 for the first time in over a decade, Mexico looks set to repeat this feat in 2013.
Andean countries: Chile had a weak year as the valuation premium over the rest of Latin America narrowed and uncertainty ahead of the presidential election in November weighed on the market. Economic growth disappointed in the first half of 2013 in Colombia but has since accelerated following a decrease in interest rates and an infrastructure stimulus package designed to improve employment and productivity. Economic growth in Peru remained strong and there was a clear divergence in performance between those companies focused on domestic demand and the miners, with domestic stocks proving far more resilient.
2014 Outlook
Brazil: much of the focus in 2014 will be on the October election. Current polls suggest Dilma Rousseff will be re-elected although the market should react positively if opposition candidates gain in the polls. The government’s focus will remain on keeping unemployment low and inflation inside the target band.
Mexico: there will be two major drivers of the Mexican market in 2014 – economic recovery and details on energy reform. Higher public and private investment and strong exports should be key drivers of the Mexican economy in 2014. Recent US manufacturing data has been very strong and as Mexico continues to gain share of US imports through improving competitiveness, those companies exporting products, or involved in export logistics, continue to be well placed. Secondary legislation on energy reform will increase visibility on the scale of the increase in private investment in the sector and its impact on Mexico’s economic growth. Early signs suggest a more ambitious reform could be approved.
Andean countries: Chile’s performance is unlikely to pick up until more details emerge on Michelle Bachelet’s economic reforms, which are expected to involve tax increases. Peru and Colombia continue to be two of the fastest growing economies in Latin America and with ambitious infrastructure investment programs, this looks set to continue. Peru expects to auction $15bn of concessions in 2014, a new record, and the Colombian government believes GDP growth could rise by 1% over 2014-18 as a result of greater infrastructure investments. Companies exposed to under-penetrated markets such as retail, banks and cement should see particularly strong growth.
