The last year has been a roller coaster for UK businesses and investors active in Latin America. Riots and slow growth in Brazil, expropriations in Bolivia, bondholder battles in Argentina and historic reforms in Mexico…
That all happened while the region was buffeted by changing Fed policy, Chinese rebalancing and lower commodity prices.
There was so much change last year but what are the big trends for 2014?
Keep the red flag flying!
One of 2013’s most interesting stories has been the success of some of Latin America’s ‘leftist’ run economies.
Ecuador, Bolivia and Nicaragua aren’t popular with the mainstream financial press, that’s for sure. But they continue to successfully combine state intervention with economic growth and poverty reduction. That’s made them among the fastest-growing economies in the region.
Now, playing growth in these countries is difficult for a UK-based private investor. One of the few options to play in Bolivia a few years back would have been Aim-listed Rurelec – but that was before its power plants were seized by the government.
One irony about the success of leftist policies in these places is the demand they stoke for Western consumer merchandise. When they try to buy the same stuff at home they get clobbered by huge import taxes on ‘luxury’ goods.
Obviously flying the stuff out yourself by the suitcase is not a great business model. Another way to play it is through Mercado Libre. This is a stock I’ve mentioned a few times before. The ‘Argentinian eBay’ has a strong sales position in a host of Latin American countries, Ecuador included. And by selling just about everything, it gives us good exposure to the consumer boom taking place in these countries.
It’ll be interesting to see how these leftist economies get on in 2014. You don’t have to be a hard line neoliberal to see some flaws in their model. Huge subsidies and fixed exchange rates are creating market distortions in Venezuela and Argentina, and Ecuador seems to have mortgaged a lot of its future oil production to China.
Even so, there has been a change of tack in Argentina and Ecuador. In both countries, presidents have recently gone on charm offensives with Western investors.
The Aztec tiger
Another big story this year has been Mexico.
It started the year as an investor favourite. The prospect of economic reforms led by new president, Enrique Peña Nieto, had got the market excited. To be fair to Peña Nieto, he has lived up to the hype, passing reforms in education, labour, tax and now, it appears, energy.
His success in tackling vested interests and complex legal hurdles is commendable. But paper victories don’t keep investors happy forever. Growth has slowed this year, owing partly to political delays to public spending changes (that should now be resolved). But Mexico will still finish 2013 as the region’s slowest-growing major player.
So what will happen in 2014?
It’s surprising just how quickly the new president made progress on reforms. But he’s still got to implement them and – even if that happens – there will be a delay before they take effect.
But as I said back in July 2012, these reforms are a bonus. They’re something that will give extra upside. The real reason for liking Mexico is its growing manufacturing muscle and its prime location next to the world’s biggest economy.
Brazil: the country of the future
Throughout the year – indeed in all the time I’ve been writing The New World – I’ve steered clear of Brazil and looked for opportunities elsewhere.
So far it’s not something I’ve had cause to regret. The economy and the market both suffered a poor 2013. The old joke, ‘Brazil is the country of the future – and always will be’, has felt particularly apt of late.
But in a recent interview with LatAm INVESTOR, Will Landers, the Brazilian fund manager of BlackRock’s Latin America Trust, sounded a more positive note. He’s the first one to admit the country’s problems – highlighting government bureaucracy in particular – but reckons that there are still exciting investments to be made in Brazil’s education, infrastructure and banking sectors.
One of the best things about Brazil is its massive constellation of investable companies. This gives investors like more options than elsewhere in Latin America.
The rebirth of Mesoamerica?
One region that I’ve been a lot more bullish on is Central America.
It’s a small one. Even if you add all the countries together, its population of 40 million is just a fifth of Brazil’s. And because the region’s capital markets are limited, there are few listed firms for UK investors to tap.
However, the few on offer have performed well this year. Moreover, there is a strong argument for looking beyond modern political boundaries and investing in the wider Mesoamerican region. This ancient culture stretched from northern Colombia up through Central America and into the southern half of Mexico – even taking in some Caribbean islands. Lots of politicians and investors I speak to reckon that the cultural and business bonds between people in the Mesoamerican region can still shape trade and investment trends today.
Looked at this way, Mesoamerica is a market of around 100 million people. Mexico’s Vice Foreign Minister, Vanessa Rubio, told LatAm INVESTOR that Mexico has been paying particular attention to the region. In fact, it’s investing heavily in cross-border infrastructure and health and security projects. These projects will effectively serve what would have been ancient Mesoamerica.
At the moment, Mesoamerica is still a niche investing theme. There are a couple of dedicated investment funds, but nothing that UK private investors can access yet. Nonetheless there see a lot of potential here – and in the coming year LatAm INVESTOR will be keeping an eye out for new ways to play the extended Mesoamerican region.
Superpower impact: where do the USA and China come in?
It’s a mug’s game trying to work out the impact of international monetary policy for the coming year. Banks overflow with smart, well-paid people trying to predict future interest rates – and they all get it wrong regularly. So there is not much point in trying to pick a number from the hat. The Fed has made it clear we can expect some tightening, but we don’t know how that will play out.
The same goes for commodity prices. The big question is whether Latin America’s most important commodities customer, China, can complete its fabled rebalancing, and how this would affect prices.
What’s more interesting is how Latin America itself reacts to these outside pressures. Recently the region has looked more resilient, and so far its major economies have managed to ride out weak commodity prices and the threat of the Fed taper.
Crazy as it sounds, low commodity prices aren’t even necessarily bad for Latin America. As long as economies are strong enough to stop the price slide from causing a depression, then a period of lower prices would allow for some much needed rebalancing.
So while a dramatic plunge in prices could cause problems, if countries are strong enough to avoid a crisis then low prices could be useful in the long run.
2014 looks set to be another interesting year for Latin America, and one with plenty of promise for investors. So join us in The New World and LatAm INVESTOR we look to unearth more investment opportunities.
This article first appeared in The New World, MoneyWeek’s FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.