Latin America’s traditional high-risk image has been replaced by a new era of maturity and stability, buoyed by strong economic and stock-market growth, which has fostered renewed confidence among investors and made the region more attractive.
The region “is firmly entrenched in a sustainable path of growth,” says Erik Nilsson, senior economist with Bank of Nova Scotia’s international research group in Toronto, adding that there has been “impressive success” in bringing inflation under control; interest rates have declined; and monetary policy is credible and forward-looking in most countries.
“Consistently positive growth rates and democratic stability are now the norm in the region rather than the exception,” suggests the Organization for Economic Co-operation and Development’s development centre’s Latin America Outlook 2008 report. It also cites macroeconomic stability, pragmatic government policies, improving fiscal conditions, infrastructural development and rising foreign investment as being key to the new outlook for the region.
Investors have traditionally approached Latin America with caution because it has historically been plagued by financial and political turmoil. The most recent examples are the Mexican peso crisis, the Brazilian real crisis and the collapse of Argentina’s financial system.
The region’s current growth is being fuelled by continued strength in commodity prices, robust domestic consumption and high levels of domestic and foreign investment. Over the past five years, Latin America’s gross domestic product growth averaged 4.4% compared with 2.6% in the previous 10-year period. GDP growth averaged 5.4% in 2007; however, it is expected to fall to an estimated 4.3% in 2008 in anticipation of deterioration in global markets.
Peru is expected to be the best-performing economy with a growth rate of 7% forecasted for 2008, followed by Venezuela at 6.5%, Colombia at 5.3%, Argentina at 5%, Brazil at 4.5% and Chile at 4.3%.
Continued high oil prices and strong demand for steel, copper and iron ore will continue to fuel these economies, says Patricia Perez-Coutts, vice president of AGF Funds Inc. in Toronto and manager of AGF Emerging Markets Fund.
Latin American countries are “resources rich” and well-positioned to fulfill global demand for commodities, adds Mark Grammer, vice president of investments and manager of Mackenzie Universal Global Future Fund, sponsored by Mackenzie Financial Corp. in Toronto.
The “run in commodity prices” has been a consequence of relatively strong global growth, especially in markets such as China and India, says Mark Mobius, the Singapore-based manager of Templeton Emerging Markets Fund, which is sponsored by Toronto-based Franklin Templeton Investments Inc. “There has been a pick-up in the domestic side of the economy” in Latin America economies, driven by “higher consumption and investments,” he adds, suggesting that the impact of this trend is more meaningful because “consumption of services and goods in the whole region is still underpenetrated, allowing for strong growth from a low base.”
From an investor’s standpoint, the performance of the stock markets in Latin America’s major countries have been among the best in the world. For the one-year period ended Feb. 29, the Morgan Stanley Capital International Latin America index was up 51.3%, compared with 30.4% for the MSCI emerging markets index and a loss of 2.3% for the MSCI world index. The MSCI Latin America index also outperformed the same indices over the three-five- and 10-year periods ended Feb. 29. (See chart above.)
Strong economic and corporate performance has also resulted in a flood of capital into the region. According to a January report by the United Nations Conference on Trade and Development, foreign direct investment in Latin America and the Caribbean reached a record US$126 billion in 2007 — 50% more than in 2006. Brazil, Chile and Mexico were the largest recipients, accounting for more than 70% of all FDI to the region in 2007. Although forecasts vary, it is anticipated that FDI to the region will fall by more than 10% in 2008.
FDI to the region has shown healthy growth from a relatively low base, Mobius says, adding that a favourable economic environment and friendly investment rules should result in continued improvement of FDI.
At a country level, Brazil and Mexico — the region’s two largest economies — are the most favoured. Both Perez-Coutts and Mobius like them because of their size and number of available investment opportunities. They have stable economic environments, large populations with access to goods and services, rising incomes and advantages in the production of commodities, Mobius says. He also sees interesting, but limited, opportunities in smaller economies in the region, such as Argentina, Chile and Peru.
@page_break@Perez-Coutts shares that view, but contends that there are few investment opportunities in the smaller countries beyond indirect investments in large global corporations that invest directly in these countries. At the sector level, she likes consumer, banking, life insurance and infrastructure.
Mobius looks at stock-specific drivers in two broad categories: consumer and commodities. He says the consumer theme is key because it involves the penetration of goods, services and housing, which shows a strong potential in the region, whereas the commodity theme is due to the region’s privileged position in terms of natural resources.
Arguably, Latin America has been resilient in the wake of a slowdown in the U.S. economy and the global credit crunch. The risk of a pullback in commodity prices is also a major risk.
Perez-Coutts suggests that besides strong commodity prices, domestic and infrastructure spending, especially in countries such as Mexico, are also fuelling sustainable growth. Although Mexico is probably the most exposed country in the region to the U.S., she believes it can withstand a U.S. slowdown. “It has plenty of reserves in its coffers for rainy days,” she says. With respect to Brazil, Perez-Coutts argues that it is “more insulated than most people think.”
Grammer suggests that the region is well positioned to trade with Europe and Asia and is not overly dependent on the U.S. Perez-Coutts agrees, adding that Latin American exporters have been very swift in diverting exports to non-U.S. destinations. In addition, Grammer says that as part of the North American Free Trade Agreement, Mexico’s trade with Canada has been increasing, reducing its exposure to the U.S. As well, the country is not as dependent on commodities as are Argentina, Peru, Chile, Colombia, and to a lesser extent, Brazil.
Nilsson argues that, in general, a slowdown in the U.S. economy is not reflected in the commodities markets. However, if China’s economy were to slow significantly, then the Latin American economies will be hurt because of their dependence on commodity exports.
Although Latin America continues to experience high levels of poverty and political problems, its fortunes are changing. Mobius believes that the region “should continue to do well.” He says that countries are showing all-time high foreign reserves, continued FDI investments inflows, strong domestic growth and lowest cost in commodity products. These factors lead him to believe that “the region is in a much better position to weather the global economic cycle and that internal factors such as reforms, and those fostering investments and consumption, will continue to be the key for growth.”
Perez-Coutts concludes that governments have enough cash to ensure sustainable growth “beyond three or four years.” This “sets the region apart from where it was 10 to 12 years ago.” IE
Latin America firmly entrenched in sustainable growth path
Consistent, positive growth and democratic stability are now the norm in the traditionally risky region
- By: Dwarka Lakhan
- April 1, 2008 October 31, 2019
- 09:59