We are optimistic it can as the region enjoys two key competitive advantages.
First, Latin America is on a different interest rate cycle than most of the rest of the world. Two years ago, central banks in Brazil and Mexico were concerned that US rates would rise significantly. Accordingly, they raised their own rates to help maintain rate differentials and support confidence in their domestic currencies. The countries entered 2006 with high rates, leading to an appreciation of their currencies and falling inflation. This afforded them the flexibility to loosen policy, regardless of the fact that tightening was still in progress in the US.
The second key long-term driver is the insatiable demand for Latin American raw materials from China. This has spectacularly remedied the region’s eternal Achilles heel of high current account deficits. The reversal has been particularly astonishing in Brazil, where a trade surplus of $40bn (€31.6bn) has suddenly appeared, allowing interest rates to slide from 19.75 per cent in May 2005 to 15.75 per cent now.
The loudest argument against Latin American this year has been the prospect of political instability in the wake of elections in Mexico and Brazil. The bout of weakness seen in the Brazilian market following the resignation in April of respected finance minister, Antonio Palocci, and his replacement by the less market-friendly Guido Mantega, demonstrates how sensitive markets can be to unexpected developments. But now that the polls are looming, the general uncertainty appears to be waning. In Brazil, it looks likely that left-wing government will hold on to power comfortably in October and, while the outcome in Mexico is less clear cut, the proximity of the country to the US and the strength of its financial institutions should soothe the concerns of investors even if its similarly extreme left-wing regime is returned to power.
From a top-down perspective, we would therefore emphasise the attractiveness of these two major markets. There is good potential in mining companies and the outlook for the price of gold – which is being viewed increasingly as a hedge against a weaker US dollar - is very positive. More generally, material companies will continue to benefit from higher prices for commodities.
Jules Mort, manager of the Threadneedle Latin America Fund.
