Latin America Looks Attractive Following Downturn

Latin America has had a difficult three years, but following political reforms and impact from the oil price fall the region now has a more positive outlook says BlackRock

Emma Wall 1 May, 2015 | 12:44AM
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Emma Wall: Hello and welcome to the Morningstar series, 'Why should I invest with you?' I am Emma Wall and here with me today is Will Landers, Manager of the BlackRock Latin American Trust. Hello, Will.

Will Landers: Hello.

Wall: So, we're looking at your region and those global emerging market fund managers, your peers, who have a broader remit are skewing their funds towards Asia and away from things like Latin America and Russia. Does this mean that we should write-off your region entirely?

Landers: I don’t think so. Obviously, Latin America has had a tough quarter – or sorry – tough three years, really, in terms of performance. But I think we're getting to the end of the cycle of bad performance, economic slowdowns and the reforms are starting to pick up steam.

Obviously, Mexico was the first one a couple of years ago and we're finally starting to get some green shoots from that. Brazil, we're in the early stages of fixing a lot of the problems, but a lot of the tail risks have been dissipated or in the process of being dissipated. So I think we're having decent story to look at it if you can take one, two, three-year view on Latin America.

Wall: One of the things that’s been happening in your region over the last couple of years is almost every single country has had an election. We're having an election here very soon. And the lot of the U.K. equity managers are saying just ignore it, it doesn’t have that much impact on the stock market. Is the same the case in emerging economies, in particular in Latin America?

Landers: I think unfortunately for firm like ours, which is based on stock picking and bottoms up stock picking, the top-down has had a huge impact on markets and on valuations. The Brazilian election last year was the big one. The markets rode up on the expectation of change, came down significantly after President Rousseff was reelected.

But what we're seeing now with the Brazilian administration is that, Minister Levy, the Finance Minister, is really implementing the plan that the opposition had talked about to a great degree. So, I think we're starting to get some of the good things that we're hoping to get if the opposition won in Brazil. But the issue is that, can you believe it's going to be sustainable for the four years.

Mexico, obviously, you had a big election. Three years ago when they had a huge impact because of all the reforms, and finally, the energy reform, which was the big one, we're going to finally start to see some of the success from that with the option that the first auction expected in the summer in July.

Big elections in Argentina later this year, but hoping for change there. Election is Peru next year, and hoping for changes there. So, unfortunately, what you can do is you can just keep looking at that, but it can have a positive impact there as we saw in Mexico and as we're hopeful we're going to start to see with Brazil, Argentina, Peru.

Wall: You have mentioned energy there and I think one of the sort of big misconceptions about the region for those who don’t know too much about it, is that Latin America is just a pure energy play. I mean how true is that or how diversified are the market?

Landers: Well, it depends on the country. When you look at Brazil, obviously Petrobras and everything that's going on with them has been – it's been what's been driving the market to a great extent. Not much to do with energy there, but obviously with the investigation. When you look at Mexico and Colombia, oil represents the biggest source of revenue for the federal government. So there they've had to make adjustments. Mexico is already a bit ahead of that. Colombia made some adjustments last year on the fiscal side, they are going to probably have to some more and that’s having drag on that economy more than any other one.

When you look at Chile, Chile is a net importer of oil. So, they are actually benefiting from falling oil prices. Overall, commodities have a big impact, not just energy, but for copper in Chile and Peru, iron ore for Vale in Brazil. But what we're looking at – when you look at what we're investing, over 70% of our portfolio is invested in domestic stories, and really what we need to see and this is where the politics come in. You need to have the stability or inflation, the growth in the middle class for the stocks to work and that’s what we're looking for in the next several years.

Wall: And that definitely is a long-term play because there will be volatility along the way.

Landers: Absolutely, and that was the reason why people are investing in emerging markets to begin with, right. It's a young population, a growing population, with growing purchasing power. That take – thing goes through their cycles, we went through a down cycle, but we think we're getting to the bottom here and I think that if you look at the next two to five years, we'll probably have another good story to talk about.

Wall: Will, thank you very much.

Landers: Thanks.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BlackRock Latin American Ord414.00 GBX0.49Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar