Despite the fact our investment process relies on the bottom-up assessment of the prospects of individual companies, a deep understanding of top-down considerations is vital to our analysis of Latin America. While the region has made tangible economic progress over the past 18 months, more challenges undoubtedly lie ahead.
Brazil has made meaningful headway, officially digging itself out of recession last quarter, but political instability resurfaced in May on the back of fresh corruption evidence against President Temer, leaving his approval rating in the vicinity of 5%. Despite Temer's subsequent survival as President, the position of his coalition in Congress has weakened, therefore limiting the scope to implement necessary fiscal adjustments including important pension reforms.
Markets continue to digest the consequences of these delays and uncertainty is likely to prevail in the run-up to Brazil's 2018 elections. On the positive side, earnings growth is being helped by the significant decline in interest rates that has followed the sharp fall in inflation expectations.
In Mexico, economic activity has held up better than expected, with support from stronger exports and improved business confidence. While the consumer has so far been resilient, given solid labour market dynamics and credit expansion, we are monitoring the impact of rising inflation against a backdrop of tightening policy conditions. NAFTA renegotiations are due to commence shortly and will need to be tied up by December in order to be approved before Mexico's presidential election campaign begins. July 2018 presidential elections are a key risk to monitor, as there is a single round and populist candidate Andres Manuel Lopez Obrador (AMLO) is currently leading the polls.
Despite not being upgraded to emerging markets status in June - much of the market had expected an upgrade - Argentina continues to strengthen its position. President Mauricio Macri has successfully renewed investors' interest by laying out a transparent roadmap for fiscal policy, attracting record levels of Foreign Direct Investment (FDI) while inflation has almost halved from 2016 peaks – all of which should support Macri's position and the country's governability heading into October's mid-term elections.
In the Andean region, the growth outlook in Peru has moderated post the commodity super-cycle, but should still fall within the region of 3-3.5% over the medium term. In the short term a corruption scandal has brought to a halt key infrastructure projects and adverse weather conditions further impacted activity, but the worst seems to be behind us. Presidential elections in Chile later on this year are likely to bring in a more market friendly administration, hopefully boosting business and consumer confidence and leading to better growth in that country after several years of underwhelming activity levels.
Despite some nearer-term risks, we believe that the medium and long-term outlook for Latin America remains attractive. Growing middle classes and political reform are creating opportunities for competent management teams that are nimble enough to seize them.
We continue to devote substantial effort to meeting with and assessing company managers through regular travel to the region, with recent trips including Brazil, Mexico and Argentina. We are confident that such meetings and careful fundamental analysis will allow us to identify companies with high returns and sustainable above-market earnings growth rates.
As many Latin American countries have implemented sound macroeconomic policies over the last decade – resulting in greater fiscal discipline, manageable inflation, and stronger financial systems – we are hopeful the region will continue to reward investors.
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