In a world where leading economies are saddled with a tenuous recovery, Latin America is proving to be a happy hunting ground for global investors always looking for the next growth story.
Exposure to Latin America as a region makes sense in any portfolio or global asset allocation strategy because this is a region that’s growing very fast, said Scott Piper, portfolio manager with Brazil-based Itau Asset Management portfolio sub-advisor to the Excel Latin America Fund.
“The region grew 6.7% [in 2010] and is forecast to grow just shy of 5% this year,” said Piper in a recent webcast. “These are very strong growth rates and they stand out, particularly in the developed world, where we’re seeing sub-par growth rates.”
Latin American markets have greatly benefited from weak U.S. recovery, with its first quarter GDP in 2011 a mere 1.8%, European debt crisis and Japan’s tragedy.
Latin America stands in contrast to the debt issue that the developed market is working with. The region, historically an overleveraged collection of countries, is now actually the opposite.
“The major point of risk for this region being debt or leverage has been eliminated over the last five years,” said Piper. “Leverage in the region is very low both from a micro and macro standpoint.”
All countries in Latin America including Brazil, Chile, Mexico, Columbia and Peru, but with the exception of Venezuela an Argentina, are investment grade at the moment.
Like many other emerging markets, the growth of this region is riding on the back of growing middle class and rising consumerism.
“The middle class essentially was non-existent 10 years ago, but has risen from about 30% of the population in Brazil, for example, to about 50% and we expect it to continue to grow over the next few years.”
That really is an amazing shift in terms of consumer power in the region. It is a trend that can be seen throughout the region. People are able to buy houses for the first time, are able to travel, have access to credit, and “this opens up a lot of investment opportunity in the region.”
The steady decline in dependency ratio means, from a demographic standpoint, the region can sustainably grow strongly over the next 10 years as more people enter into the workforce and support the economy, said Piper.
“The rising middle class and consumption is the first pillar of growth in the region,” he said. “Second is rising investment; throughout Latin America investment levels to GDP are structurally still quite low.”
With low investment to GDP and strong fundamentals Latin America is poised for substantial rise in investment levels. Further, low interest rates have created an investment landscape that is attracting investments not only from corporates but also from governments.
One can not underestimate the catalytic effect of the soccer World Cup and the Olympics, both taking place in Brazil in 2014 and 2016 respectively, as the government turns its focus on meeting the infrastructure demands of events of such scale.
“There is also been a tremendous amount of offshore energy reserves that have been discovered in Brazil and Columbia and so spending in the energy space is something that will drive infrastructure spending and investment in general over all over the next several years,” said Piper.
There are general signs that the tightening process in the region is working meaning that the economy is beginning to show signs of slowing, enough to ease inflation fears.
“Inflation expectations as reflected in the fixed income market have now started to come down quite consistently,” he said. “Quite clearly the market’s becoming more comfortable domestically that the economy is slowing down, that the policy measures taken by central banks and governments to slow down the economy are in general working and fears of incremental policy measures have begun to recede.”
Latin America, he added, is in the final stages of the tightening process that have been going on for the last 12 months. “I think that’s good news in terms of easing fears that [these] economies are overheating.”
These markets look quite attractive from a valuation standpoint, too. “Brazil is now trading below 10 times price to forward earnings, which is not only very cheap in absolute terms, but it makes it one of the cheapest markets in the world.”
From a structural standpoint, Latin America makes a lot of sense both in the medium and long term. “I think we are going to see strong secular growth at low risk, particularly relative to what we see in the developed world,” said Piper.