Interest rates have been falling in the major markets for the past few years and, while there are risks of rate hikes, we think the consumer side of the economy remains very well positioned. Buying power is healthy, driven by significant job creation and better access to credit.
As a whole, Latin American corporates and consumers are very underleveraged. In some countries, the proportion of bank lending relative to GDP is less than 10 per cent, compared with over 200 per cent in the US, leading us to believe domestic lending is still strong. Another driver for growth is increased expenditure on infrastructure; both Mexico and Brazil, for instance, plan to spend $200bn on infrastructure in the next five years.
Valuations remain attractive, with the region still at a discount compared with the rest of emerging and developed markets. At the same time, earnings growth forecasts are less at risk in Latin America than they are in the US.
Brazil’s economy is showing a strong momentum, valuations are attractive and it offers a wide range of stocks to choose from. With interest rates at historical lows, Brazilians have been moving money out of fixed income and into equities. The country has $750bn pension assets and, historically, 90 per cent has been invested in fixed income. This has dropped to 85 per cent and there is still room for more money to move into equities.
Colombia is seeing an investment-led boom financed by both foreign and domestic companies. The consumer sector is strong, valuations are reasonable and we believe this is a market that investors have generally overlooked. A catalyst for further growth will be the removal of capital controls, which have been relaxed. As the government continues to partly privatise the state-owned oil company, a lifting of the remaining controls might be on the cards to attract foreign investment.
We are concerned about the outlook for Mexico, which has the largest exposure to the US economy in the region. However, some sectors (housing, infrastructure) should do well regardless of what happens in the US.
Changes in pensions regulation and concerns about inflation in Chile mean we are currently underweight the country. We are approaching other smaller markets in the region on a stock-specific basis.
Urban Larson, director, emerging equities, at F&C and manager of the F&C Latin America Equity Fund.
