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Are you missing hottest investment spots south of Havana?

Investment experts always talk about the importance of having a globally-diversified portfolio, but there are some parts of the world that often fall off the radar. 

One is Latin America, a vast area spanning 33 countries that has had more than its share of difficulties, but may offer brave investors great opportunities. 

Ed Kuczma, co-manager of BlackRock Latin American Investment Trust, believes the region ‘may be one of the most important beneficiaries of recovery as the world rebuilds after the pandemic’. 

Carnival time: Investment experts always talk about the importance of having a globally-diversified portfolio

Latin America is one of the most abundant regions in the world for commodities such as iron ore and copper. As the world recovers, demand for these materials is escalating and benefiting producers in the region. 

‘Vast stimulus in the US and economic recovery across the world has pushed up demand for commodities after a period of tight supply,’ says Kuczma. ‘Governments around the world have ambitious, commodity-heavy infrastructure plans, particularly for green energy development.’ 

Domestic spending in many Latin American countries is also rising, which Kuczma says should benefit companies in the region. ‘Across Latin America, a growing middle class is fuelling domestic consumption and after a brief hiatus from the pandemic, this spending appears to be resuming,’ he adds.

Countries across Latin America have had a tough time in recent years with political strife and a terrible response to Covid-19. Poor environmental track records are also a key issue. 

As a result, company values are depressed, and some experts believe undervalued. 

Dzmitry Lipski, head of funds research at wealth platform Interactive Investor, says: ‘Valuations are still relatively attractive when compared with broader emerging and developed markets.’ He adds that in June, ratings agency S&P increased its forecast for economic growth in Latin America’s major economies from 4.9 per cent to 5.9 per cent over the next year. 

Where opportunities lie for investors 

Latin America is a huge region, representing 13 per cent of the world’s land surface area and nine per cent of the world’s population. 

Not all of it will present opportunities for investors. 

Jason Hollands is managing director of wealth platform Tilney Bestinvest. He says: ‘Although there are more than 30 countries in Latin America and the Caribbean, most are completely uninvestable from a public markets perspective.’ 

Hollands says there are six investable markets: Brazil, Mexico, Argentina, Chile, Colombia and Peru. 

‘Even here it really is a two-horse race, with Brazilian companies representing 65 per cent of Latin American equities and Mexico just shy of 24 per cent,’ he adds. 

Eduardo Figueiredo, Latin American investment manager at Aberdeen Standard Investments, believes these countries in particular show potential. 

‘Brazil is benefiting from quickening economic activity, a healthy current account and a favourable outlook for commodities,’ he says. ‘Mexico is enjoying robust support from the rebound in manufacturing activity in the US.’

Beware volatility in the region’s markets 

However, investing in Latin America is not for the faint hearted. 

Figueiredo admits the region has a ‘notorious reputation for political instability, endemic corruption and periodic crisis, which manifests itself in very high levels of stock market and currency volatility’. Brazil, in particular, has struggled in recent years. Juliet Schooling Latter, head of research at fund scrutineer Chelsea Financial, says that although the country’s shares had a strong second quarter, ‘this comes after a prolonged period of underperformance compared with other emerging markets’. 

‘Brazil’s poor handling of Covid has been exacerbated by the worst drought it has had in almost 100 years, so the current government is very unpopular,’ she adds. 

Finding the right companies is key in a region with such difficulties, adds Figueiredo, and there may be more political instability on the horizon. 

However, he believes that by focusing on quality stocks and investing in well-managed businesses with sound financials, investors can benefit from a Latin American upturn while avoiding some of the risk.

Why emerging market fund may be answer 

Because of the volatility in the region, an investment should only form a small element of a well-diversified global portfolio. Investors in global passive funds will already have a small exposure to Latin America. For many, this will be enough. 

However, for those with confidence in the region and who feel it may be undervalued, an active global fund or emerging market fund with a higher weighting towards Latin America may be a good option, or else a fund dedicated to investments in the 33 countries. 

Schooling Latter says ASI Latin American Equity is her preferred fund in the region. The shares are up 18 per cent in a year, reflecting the recent Latin America bounce, but down four per cent over three years. Over half the fund’s investment is in Brazil, with Mexico the next largest component and nearly six per cent in Chile. Only a small percentage is invested in Peru. 

The fund’s largest holding is Vale, a mining company that produces the largest amount of nickel and iron ore in the world. It also invests in the Mexican subsidiary of grocery giant Walmart, which should benefit from the country’s emerging middle class. Lipski prefers investing in Latin America through emerging market funds, which allow managers to adjust their exposure in response to political volatility in the region. 

He likes JPMorgan Emerging Markets Trust and Utilico Emerging Markets Trust, which have returned 47 and 17 per cent over the past three years respectively. He also rates Mobius Investment Trust, which was launched just under three years ago. 

The JPMorgan trust has Argentine-headquartered ecommerce giant Mercado Libre among its top holdings, while Utilico holds Brazilian power generator Alupar and Brazilian logistics conglomerate Simpar in its top ten.

Hollands likes Aubrey Global Emerging Market Opportunities fund, of which 7.9 per cent is invested in Brazilian companies.

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