The term ‘emerging markets’ describes economies which are growing at a fast pace and working to make their economic progress more sustainable. From an investment perspective, the stock markets of these countries are more volatile than the mature markets of developed countries but offer higher returns. Thereby, making them more attractive as well as riskier. Morgan Stanley Capital Investment (MSCI) classifies countries as developed, emerging or frontier markets based on certain criteria. To be classified as an emerging market, there should be ‘significant’ openness to foreign ownership, ‘significant’ ease of capital inflow and outflow, ‘good and tested’ efficiency of the operational framework and ‘modest’ stability of the institutional framework.
Let’s track the investment opportunities offered by the countries of Latin America classified as emerging markets by MSCI. The MSCI Emerging Markets (EM) Latin America Index captures, “large and mid cap representation across 5 emerging markets (EM) countries in Latin America.” This index is one of the most trusted measures of how these stock markets in the region are performing; however, all the constituent countries do not have a proportional representation in the index. The country weights in the MSCI Emerging Markets (EM) Latin America Index are: Brazil 46.6%, Mexico 36.51%, Chile 9.79%, Colombia 4.17% and Peru 2.93%. The table below compares the returns of the cumulative MSCI Emerging Markets Index, MSCI EM Asia Index, MSCI EM Latin America Index and MSCI World Index.
Santiago de Chile. Shutterstock photo
Chile has been one of the fastest-growing economies of Latin America over the past decade. The economy has grown at an average annual rate of above 5% since 1990, the time when it embraced democracy. In recent years, Chile experienced contraction in its growth twice, in 1999 (0.8%) and again in 2009 (1.0%). The economic expansion post 2009 has been steady and the economy has grown at an average 5.3% since 2010 to 2013, however, 2014 saw its GDP falling to 1.9% primarily due to the end of the commodity super-cycle which resulted in falling copper prices and stalled investment activity in its mining sector. As a result, Chile or the “Copper” economy is currently combating issues like rising unemployment and fiscal imbalance. Investors can bet on Chile given its strong and transparent financial system, strong base of natural resources and inevitable recovery in commodity prices going forward.
Santiago Stock Exchange IPSA Index posted impressive returns of 37.59% in 2010 followed by an alternative pattern of dips and recovery in the next four years. The returns for 2011, 2012, 2013 and 2014 were recorded at (15.22%), 2.96%, (14%) and 4.10%. The stock markets are currently down by a 1.1% year-to-date in 2015.
The iShares MSCI Chile Capped ETF (ECH) is one of the best ways to take exposure to Chile’s stock market. There are also many stocks listed as American Depository Receipts (ADRs) that can be consider, Banco de Chile (BCH), Banco Santander, (SAN), Compania Cervecerias Unidas (CCU), Freeport-McMoran Inc. (FCX), Southern Copper (SCCO), Embotelladora Andina (AKO.A), and Endesa-Empresa Nacional de Electricidad (EOC) are a few of them.
Rio de Janeiro. Shutterstock photo
Brazil came to prominence with its inclusion in BRICS, one of the most well-known acronyms representing the top emerging economies. With a $2.346 trillion gross domestic product, the Brazilian economy is the largest in Latin America and seventh largest in the world. Brazil has been one of the fastest growing economies until a couple of years back. The economy grew at 7.6% in 2010 but 2011, 2012 and 2013 saw the economy cool down as Brazil grew at a moderate average rate of 2.8% during this period. However, it was jolted in 2014, which led to its GDP growing by just 0.1%. Brazil’s economic scenario looks dull; the government needs to weather out external economic pressures while addressing the domestic macroeconomic imbalances.
The Brazilian stock markets are the home to some of the best companies in the world and the current situation is a good chance to pick some of the fundamentally sound stocks that are currently depressed. Some of the ADRs trading in the U.S. are Ambev S.A. (ABEV), Itau Unibanco Holding (ITUB), Banco Bradesco (BBD) Finance, Vale S.A. (VALE), Telefonica Brasil (VIV), Ultrapar Participacoes (UGP) and TIM Participacoes (TSU), among few other companies. Some of the good ETFs tracking the Brazilian stock markets are the iShares MSCI Brazil Capped ETF (EWZ), Deutsche X-Trackers MSCI Brazil Hedged Equity ETF (DBBR), ProShares UltraShort MSCI Brazil Capped ETF (BZQ), and Market Vectors Brazil Small-Cap ETF (BRF). The Brazilian stock markets have been in red on annual returns for the last four years since 2011. The markets are down by 2.99% year-to-date in 2015.
Church of St. Peter Claver in Cartagena. Shutterstock photo
Colombia’s economy has come a long way despite its constant struggle with armed rebels, human rights violations, and presence of drug cartels. The country has grown at an average annual rate of 4.4% since the start of the new millennium. Colombia grew at 4.6% in 2014, much above the regional average of 1.5% on the back of sound monetary policy execution. The overall credit for Colombia’s growth goes to the boom in commodities and government initiatives to promote the nation as an investment destination by bringing in much-needed reforms. The growth is expected to slow down a bit in the current year, stretching to next year but should remain ahead of its peers in the region.
The two main exchange traded funds focused on Colombia are Global X MSCI Colombia ETF (GXG) and iShares MSCI Colombia Capped ETF (ICOL). Some of the Colombian companies that trade as ADRs on American exchanges are BanColombia S.A. (CIB), Ecopetrol S.A. (EC), Avianca Holdings S.A. (AVH), Grupo Aval Acciones y Valores S.A. (AVAL). The Colombian stock exchange is current down by 17.32% year-to-date in 2015.
Machu Picchu. Shutterstock photo
Over the past decade, Peru’s growth numbers have been impressive, the country registered average growth rate of 6.1% between 2005 and 2014. Peru’s high growth rate was achieved with contained inflation; this was possible with its sound macroeconomic policies and structural reforms with a favorable external environment. Like most other countries, 2014 has been a slowdown year with its GDP dropping to 2.4% from 5.8% a year earlier, accentuating the decline in investments and domestic confidence. The challenge for Peru lies in achieving a stronger and sustainable economic growth.
The equity markets in Peru have been weak lately with a fall of 23.63% and 6.09% during 2013 and 2014, respectively. The markets registered smart returns of 64.99% in 2010 which was followed by a fall of 16.69% in 2011 and subsequent recovery of 5.94% in 2012. Launched in 2009, the iShares MSCI All Peru Capped ETF (EPU) provides access to the Peruvian stocks with its portfolio of around 25 holdings. The fund has a minor allocation of 3% towards the Canadian markets. Investors can also subscribe to the Peruvian ADRs listed in the U.S. like Cementos Pacasmayo S.A.A. (CPAC), Buenaventura Mining Company Inc. (BVN) and Grana y Montero S.A.A. (GRAM).
Mexico City. Shutterstock photo
Mexico, a trillion-dollar economy, is second largest in Latin America and 15th largest in the world. The Mexican economy recovered well after a dip in 2009, averaging at 4.4% during 2010-2012. However, the economy has slowed since 2013 majorly because of the declining oil production and sharp fall in oil prices. The government has placed policies to reduce the public sector expenditures over a two-year period (2015-16) to counter the effect of low oil prices. According to the World Bank: “A gradual recovery of economic activity is expected to continue, with economic growth strengthening from 2.3% in 2015 to 3.0% in 2017.”
The returns for the Mexican stock exchange for the years 2010, 2011, 2012, 2013 and 2014 have been 20.02%, (3.82%), 17.88%, (2.24%) and 0.98%. The Mexican stock markets are currently up 2.18% year-to-date in 2015. There are many ETFs targeting the Mexican markets, the top ones being iShares MSCI Mexico Capped ETF (EWW), Deutsche X-trackers MSCI Mexico Hedged Equity Fund (DBMX), ProShares Ultra MSCI Mexico Investable Market (UMX), iShares Currency Hedged MSCI Mexico ETF (HEWW), SPDR MSCI Mexico Quality Mix ETF (QMEX) and ProShares UltraShort MSCI Mexico Capped IMI (SMK). Some of the Mexican stocks trading in the U.S. as American Depository Receipts are America Movil, S.A.B. de C.V. (AMOV), Cemex S.A.B. de C.V. (CX), Fomento Economico Mexicano S.A.B. de C.V. (FMX) and Grupo Aeroportuario del Centro Norte S.A.B. de C.V. (OMAB) among others.
Notes: MSCI constituent’s weights according to the September 30, 2015 factsheet. The return-to-date returns as of October 15, 2015. GDP growth figures based on World Bank data. MSCI World Index which covers 23 developed markets from America, Europe and Middles East as well as Pacific region. MSCI Emerging Markets Index, a representation of 23 countries from Asia, Europe, Middle East & Africa and America.