Latin America: A story of resilience

Jeff Casson, manager of the Martin Currie Latin America fund, says global macro economic clouds are obscuring positive changes in the region.

In a familiar pattern, the woes of the developed world have weighed heavily on emerging stockmarkets in recent months. Latin American markets have been hit particularly hard, falling twice as far as the MSCI World in the first nine months of this year.

Certainly, a slowing US economy and the apparently incessant spiral of European debt crises do pose some risks to the economies of Latin America – most obviously, through weaker demand for the region’s exports. And there are domestic problems too. In particular, the region’s central banks must remain vigilant against the threat of inflation, as well as managing fluctuations in their currencies.

But despite these concerns, the fundamentals of Latin America’s economies – and, more importantly for stockpicking investors, its companies – remain supportive. Our recent visits to the region have confirmed this. Although inflation and rising wage costs are putting pressure on many Latin American firms, most of them are still able to manage the issue through higher pricing. And while the slowdown in the Western world – and indeed in China – will have knock-on effects on the economic growth of Latin American countries, domestic consumption has become an increasingly important engine of that growth – as any visit to shopping districts of Rio de Janeiro or Lima makes abundantly clear.

So while the current global macroeconomic clouds are not likely to clear any time soon, they are serving to obscure the ongoing positive change that makes Latin America such an attractive long-term investment opportunity. That positive change is evident in growth rates that are materially stronger than developed markets, stable politics, and domestic consumption.

Political stability

Greater political stability has resulted in steadier policy. Take Brazil for example. From 1980 to 1994, the country had five presidents and no fewer than 15 ministers of finance. In contrast, from 1995 to 2010 there have been just two presidents and three finance ministers. Similarly, over the past 15 years, the average annual rate of inflation has been 7%; from 1980 to 1994, it was some 730% – and the country changed its currency five times over that period.

And, comfortingly for investors, Latin America’s new-found political stability is proving to be resilient. In Peru, recent developments have assuaged initial fears that leftist candidate Ollanta Humala’s victory in this year’s presidential election would herald a lurch back to populism.

Since taking office, President Humala has been strikingly centrist in his policies towards industry, mining in particular, with strong indications that international standards will be applied to mining royalties and taxation. The region’s voters do not appear inclined to give up the fruits of capitalism – and politicians appear to have taken note.

Demographic trends are positive across the region too. Latin American populations are young, with the proportion of workers far larger than the dependents that they support. And those populations are increasingly affluent, with growing spending power and rising appetites for consumer goods. The region is less export-dependent than it once was – and thus better placed to weather a further global slowdown. Also, the strength of the economies has allowed central banks throughout the region to accumulate significant foreign-exchange reserves.

There is a silver lining, too, in the tightening regimes that Latin American central bankers have pursued over the past year. In September, the Brazilian central bank cut rates by 50 basis points. Although the move came earlier than expected, it shows that, after raising rates repeatedly, Latin American policymakers have significant room for manoeuvre now that global growth looks uncertain.