We remain positive on the ability of export and, especially, domestic companies to continue generating strong earnings growth.
Increased expenditure on infrastructure across the region will continue being a major driver for growth in countries such as Brazil and Mexico - both planning to spend around $200bn each on infrastructure projects over the next 5 years. We are very positive on Brazil where a record 1.9m new jobs were created in 2007. Inflation is at 4.5 per cent - a 60-year low - and bank lending is growing at around 25 per cent year on year. Credit to GDP is at 35 per cent only, compared to 200 per cent in the US leaving considerable room for increased consumer and corporate leverage.
There are also good prospects for further growth in a Brazilian stock market that is currently comprised of 60 per cent commodities and 40 per cent non-commodities. We remain very positive on the Brazilian oil and gas and oil services sectors as we expect sustained growth in oil production.
Mexico has been one of the best performing markets year to date - up to 9.9 per cent in US dollar terms, despite the high exposure of its economy to the US. The resilience of the Mexican economy so far has surprised the market, given that a slowdown was expected.
During the US recession of 2000, Mexico was hit because its economy lacked drivers other than exports to the US but things are more balanced now. Banks have started to lend and solid finances allow the government to have a counter-cyclical fiscal policy in place, using the windfall from oil revenues for social spending and infrastructure investment.
Despite the risk that the US slowdown will come to hurt Mexico more than it has so far, the country currently offers attractive investment opportunities, especially in the wireless, infrastructure and housing sectors. This month President Felipe Calderón is expected to present a proposal to reform the Mexican energy sector, allowing private capital to be invested in the cash-starved oil industry, currently a government monopoly. Allowing private sector investment could boost the sector, creating significant investment opportunities, but we are not optimistic that major changes will be made in the near future.
Urban Larson, director, emerging equities and manager Latin America Equity Fund, F&C.
