Unlocking investment opportunities in Latin America

With much of the world appearing volatile, Latin America appears relatively stable, while the nearshoring trend, plus its commodities sector, make the region attractive to investors.

A shock Mexican election result – which spooked markets earlier in June, putting pressure on the peso – has once more thrust Latin American markets into the investment spotlight.

A left-leaning government led by Claudia Sheinbaum has focused investors. Her anticipated fiscal proposals, substantial spending programmes and promised minimum wage increase all spring to mind. Some wealth managers feel they need to re-assess the status of Latin America as an emerging market.

(…)

Latin America - an underdog?

While several emerging markets have seen their appeal decline in recent years, Latin America has remained on the sidelines and, at times, capitalised on these challenges. Now it is increasingly seen by investors as geographically distant enough from China, Russia and Middle Eastern flashpoints to merit its own investment allocation.

“Latin America presents a picture of relative stability,” says Gustavo Catalán, head of equity research for Latin America at LarrainVial Asset Management, which manages $7.5bn in assets. “Most countries boast solid democracies and a general respect for the rule of law, though with some exceptions. This stability is proving attractive in a world fraught with geopolitical tensions.”

Latin American nations are “actively benefitting” from global instability, believes Mr Catalán “Mexico has emerged as a more significant supplier of goods to the US, while Brazil has seen a substantial improvement in its trade balance thanks to exports of key commodities like oil and soybean,” he says.

For the first time in 20 years, Mexico is the leading source of goods imported by the US, overtaking China. According to figures released earlier this year by the US Commerce Department, the value of goods imported by the US from Mexico rose nearly 5 per cent from 2022 to 2023, to more than $475bn. Conversely, the value of Chinese imports dropped 2 per cent to $427bn.

Promising sectors

Commodities could prove pivotal for investors, discussing which Latin American assets to buy into. Mr Catalán believes they represent an “attractive investment” opportunity due to a “dynamic of strong cash generation”. Restrictive physical supplies, combined with prices well above production costs, should further “drive” this trend.

Copper and oil are prime examples of this dynamic. The region accounts for 40 per cent of global production of copper, with Chile leading the way at 27 per cent followed by Peru (10 per cent) and Mexico (3 per cent).

The region is also seeing technological change, boosted by a rising population. “With a youthful population of 652m, the region creates a fertile ground for expansion of digital services, especially ecommerce and digital banking,” says Mr Catalán. “These industries have demonstrated consistent growth across various economic and political landscapes, suggesting a long-term trend with no signs of slowing down,” he explains.

Despite these industries being “relatively young”, Mr Catalán pinpoints two leading companies: “Mercado Libre, the regional powerhouse in ecommerce, holds a dominant position in most markets it operates in. In digital banking, Nubank has disrupted the Brazilian market and sets its sights on replicating that success in Mexico and Colombia,” he says.

A risk worth taking?

A strained Mexican peso is nothing new and can be an “inherent risk”, according to Mr Catalán. “Equities and currencies tend to move in tandem, amplifying the cyclical nature of stocks. This is especially true for industries heavily reliant on domestic factors, such as consumer staples and discretionary goods.”

But the Latin American region has a unique feature that helps it counter such currency movements – the high weighting of commodities in stock indexes. “These commodities often act as a hedge against currency depreciation during economic downturns,” he says.

Many Latin American economies boast high real interest rates, with some, like Brazil and Chile, experiencing record trade surpluses. These factors can act as “buffers” to mitigate further currency depreciation.

An American helping hand

Some industry leaders believe the world is fragmenting around two economic superpowers. The question is whether Latin America can benefit from this split. Since Donald Trump’s shock election win in 2016, US foreign policy has undergone a dramatic shift, particularly regarding China.

This shift has continued under president Joe Biden’s administration, with increasingly negative rhetoric toward China. “Regardless of the next presidential election’s outcome, Latin America is likely to be viewed as a key trading partner to reduce US dependence on Chinese supply chains,” says Mr Catalán. “Nearshoring to Mexico exemplifies this trend, and it’s expected to continue in the coming years,” he claims.

He also believes the region will be a valuable partner in securing critical materials like lithium, copper, and rare earth elements.

Source: PWM by the Financial Times