Political turmoil continues in the Middle East. A debt crisis
brews in Europe. China and other emerging markets battle inflation.
Amid the uncertainty, assets have begun to flow from emerging
markets into the US. But Heiner Skaliks, manager of
Strategic Latin America
notes that Latin American countries have emerged from the
turbulent decades of the 1980s and 1990s stronger than ever. These
countries enjoy robust economic growth and relatively low levels of
inflation. For sound investments in stable developing markets,
investors need only look south.
How does Latin America compare to the rest of the world
as an investment destination?
Latin America used to be in the spotlight for all the wrong
reasons, especially in the 1980s and 1990s when the region
experienced social and economic turmoil as well as hyperinflation.
In the 1980s Bolivia had an inflation rate of 25,000 percent. If
you didn't spend your money immediately, the goods you needed at
the store would have doubled in price.
In the past Latin America was plagued by three ghosts. The first
was political instability, but the region has come a long way on
that front. Last year, four regional presidential elections
resulted in smooth transition of power; these democracies have
Weak currencies were another historical challenge for Latin
America. Local currencies reflect the strength of these nations'
real economy. The US dollar, the German deutschmark and the British
pound were king in the region because the local currencies were so
weak. You could purchase just about anything with foreign currency
in those days. In the 1980s and 1990s, Latin American economies
were in a developmental stage. Consequently their currencies were
weak and volatile, limiting the regions growth potential.
Inflation was the final ghost. High demand combined with low
economic output drove prices higher. The situation is far different
now. Few countries in Latin America-except Brazil to a certain
extent-are experiencing double-digit inflation. The threat of the
three ghosts diminishes as Latin America achieves a higher level of
political, social and economic maturity. Other regions of the world
are just beginning to undergo similar changes. Hopefully this
transition won't involve bloodshed and will create better living
conditions for the people who live there.
Additionally, in the 1980s and 1990s, Latin America's population
and internal demand was less than 20 percent of what it is today.
The region's population currently stands at about 600 million,
which is twice the size of the US population. This surge in
population has created a robust internal market. We've witnessed a
significant south-south trade of goods and services-for example
Brazil exporting to Bolivia or Columbia exporting to Peru. That's a
far cry from previous decades when the largest buyers of Latin
American goods were the US, Europe and Japan
The region is also blessed with natural resources that are now
packaged with a higher value-added proposition. This is the case
for both finished goods and the raw commodities that are essential
inputs to global economic growth.
Furthermore, a rising middle class has become an increasingly
important target market for goods and services. The consumer market
is growing at an annual rate of 4 to 5 percent. Strengthening
currencies also have boosted the middle class' spending power. More
Latin American goods and services are consumed within the region-a
Is it still fair to say that resources are largely
responsible for the region's wealth?
Resources are one of the main drivers of the region's wealth.
But tourism and exports of local services are also contributing to
economic growth. There's also manufacturing. US and European
companies are beginning to grow wary of China as labor costs rise.
Increasingly, they're looking to Central America for labor.
Technology and pharmaceutical companies, in particular, are
beginning to focus on Brazil and Chile. Although the process is in
an early stage, it's reducing the region's dependence on resources
for economic growth.
Given that resources still play a critical role to the
region's economy, will slowing economic growth and inflation in
countries such as China crimp Latin America's growth?
Capital always seeks the highest potential return. At the end of
last year, we saw an outflow of funds from Latin America back to
developed economies. Investors bet on a speedier recovery in the US
and a more promising outlook in Europe. In the first quarter of
2011, capital returned to Latin America because the region provides
investors with promising growth characteristics and returns.
Meanwhile, China is trying to slow down its economic growth by
draining cash from its financial system through interest rate hikes
and higher bank reserve requirements. Given that the economic
recovery in the US will likely be slower than what was previously
expected, money will continue to flow into Latin America.
What Latin American countries would you suggest investors
Peru is a good option. The country's economy grew by 9 percent
in the first quarter amid manageable inflation. Peru has a strong
monetary policy and its currency has been more stable than those of
other countries in the region. Peru is also rich in natural
We also like Brazil because of its high demand for housing and
infrastructure. Brazil will host the 2014 World Cup and the 2016
Olympic Games in Rio de Janeiro-the world's two largest sporting
events. These are expected to draw massive flows of goods and
services to Brazil, and the country is beginning to prepare for
But Brazil is overvalued. A colleague of mine attended a
conference there in mid-May and paid USD12 for a croissant and a
cup of coffee at a local corner shop. That's more expensive than
what you'd find in New York or Tokyo. Brazil has a population of
about 180 million people, making it the largest country in South
America. This means that there's still significant potential for
growth, but it isn't an across-the-board opportunity.
Investors must be selective when deciding which industries to
invest in. We like banking services because a large portion of the
population still lacks access to financial services. We also are
bullish on consumer goods and anything related to food or retail
We're also looking at Mexico whose economy directly reflects the
pace of the US recovery. If the US economy improves at a faster
rate than predicted, this growth will spill over into Mexico.
What are your favorite picks in the region?
) is Peru's largest financial holding company and owns the largest
commercial bank in the country. The firm also has operations in
Bolivia and we are confident in its management. The company's
earnings grew 46 percent year over year in the first quarter. But
there's more room for growth because many Peruvians continue to
lack access to banking services.
On the fixed-income side, we own
JBS SA 10.5% due 8/4/2016
(ISIN: USP59695AC39). JBS (Brazil: JBSS3, OTC: JBSAY) became the
world's largest meat processor after it bought US-based Swift and
Pilgrim's Pride. Those acquisitions demonstrate the degree to which
globalization has benefited Brazilian companies.
Staying with fixed income, we also like
Financiera Independencia SA de CV 10% due
(ISIN: USP4173SAB09). Financiera Independencia is one of Mexico's
largest microfinance institutions and has tremendous growth
potential arising from a low penetration rate for financial
services in the country.
Are there any countries or sectors that investors should
We don't invest in Bolivia because the fixed-income rates in US
dollar-terms are lower than what you can find in the US. The same
is true in Ecuador and Venezuela, where there's simply too much
risk for too little reward.
What's your best piece of advice for investors?
Diversification is key. I suggest that investors allocate 10 to
15 percent of their portfolio to Latin America. Ideally those
investments would include both equity and fixed-income
Article Republished with permission from <a href="http://www.KCIinvesting.com" rel="nofollow">www.KCIinvesting.com</a> and <a href="http://www.rukeyser.com" rel="nofollow">www.rukeyser.com</a>