Under the microscope: Latin America

Jason Hepner, investment director for global strategy at Standard Life Investments, looks at whether your clients could benefit from investing in this diverse region

Amid all the volatility in global financial markets, correlations between asset classes are at multi-year highs. This has resulted in markets in countries with very different fundamentals behaving in a rather similar fashion.

For example, stocks in several Latin American countries underperformed sharply in recent months, a clear sign of global risk aversion. A closer look at the region’s fundamentals is warranted.

Mexico

Starting with Mexico, we can see an economy that sells almost 80% of its exports to the US, and hence is relatively insulated from a eurozone recession.

Yes, there are financial market linkages that keep Mexican assets under pressure; however, in essence, Mexico is the manufacturing backyard of the US, so its economic outlook will be a function of how robust or otherwise the US is. Mexico’s central bank is orthodox in its monetary policy. Inflation at close to 3% a year is the happy consequence of policymaking stability, building good credibility over many years.

Politics are difficult in Mexico though, and there is a substantial crime problem that makes for unpleasant headlines. That said, Mexico is an investment grade country as defined by the credit rating agencies. It has a strong demographic profile, a government debt to GDP ratio of only around 35% – the envy of many other countries – and its real GDP growth trajectory of around 3.5% is attractive in a global context.

Brazil

Brazil dominates the economic landscape of South America, although it too has seen its asset prices buffeted by global events. Like Mexico it enjoys a debt sustainability profile that is satisfactory at this time, a function of the country’s large primary surplus and impressive economic growth.

Admittedly, inflation is running towards the high end of the central bank’s targeted range, at around 6% a year. However, base effects, and the lagged effects of many months of monetary tightening, should improve the inflation outlook going forward. While Brazilian growth is slowing, around flat sequentially in the most recent quarter, the underlying trend growth rate of Brazil is still quite good – as long as demand from China continues to support activity.