Old Mutual: Latin America Reform is Good for Investors

Old Mutual Emerging Market Debt fund manager Delphine Arrighi says political reform in Argentina and Brazil is creating good investment opportunities

Emma Wall 17 October, 2017 | 11:31AM
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Emma Wall: Hello and welcome to the Morningstar Series "Why Should I Invest with You?" I'm Emma Wall and I'm joined today by Delphine Arrighi, Manager of the Old Mutual Emerging Market Debt Fund.

Hello Delphine.

Delphine Arrighi: Hello.

Wall: So, you have a very broad remit, but I thought for the purposes of today we could focus on Latin America, because there is a lot to talk about in the region, not least that there has been significant political change over the last couple of years. You are seeing positive reasons to invest in this particular area of the world, aren't you?

Arrighi: Absolutely. I think the two main economies in the region that have benefited from that strong wave of political change and reforms are mostly Brazil and Argentina. Despite the political scandal that we've seen in Brazil with the current President Michel Temer in the summer it's still been able to pass a lot of the structural reforms that the country needs. And this in return has also helped to boost growth in a more sustainable manner. So, we think that that political change that is also taking place in Argentina with the administration of President Macri has also pushed for a lot of structural reforms in the economy and are finally yielding results in terms of GDP growth, inflation stabilising as well. And we think that all those improvements on the macro story are sort of fulfilling a good cycle and are now helping the population to recognise the benefits of those new regimes and sort of give them more credibility and more sort of momentum to continue their reforms going forward.

Wall: Should we expect to see a bit more stability in this region, then?

Arrighi: That’s definitely what we hope. We have presidential elections again in Brazil next year. And the consensus so far is that because growth has been much better than expected, inflation has also come down to historic lows below 3% which is kind of unprecedented for Brazil. So, we are now seeing a sort of receding momentum for more extremist candidates. We’ve seen former President Lula for example that he has lost a lot of support. He also has his own political scandal of corruption. But beyond that we've seen that even in the north where he used to have his traditional stronghold is receded a lot and we think that he will not even be able to present himself and run for the campaign next year.

Wall: And how threatened is Latin America by the protectionist stance that the US and Donald Trump are taking?

Arrighi: Well, we think the issue is particularly important in Mexico as we know there is renegotiation of the NAFTA agreement. We don’t necessarily expect some contagion to the rest of the region where trades within Latin America remains fairly strong. But obviously if NAFTA were to be renegotiated as we are seeing right now a risk of potentially the U.S. dropping out of the negotiation then Mexico would obviously suffer a lot.

Wall: And of course, emerging markets issue debt in two currencies, local currency and in U.S. dollars are you seeing greater opportunities in either or, or do you see opportunities in both?

Arrighi: Well in the case of Brazil and Argentina, we still like both hard currency and local currency, like I was saying inflation has been anchored at very low levels in Brazil and we think that this is not yet reflected in the local yields. Part of this is due to the still sort of political uncertainty and fiscal outlook getting into next year, but we think there is an opportunity there.

In Argentina we are still looking at very high real rates locally because inflation is still very high and the central bank could eventually hike rates again before yearend to try to tame the inflation outlook there. In Mexico it's slightly different story, inflation has finally peaked in the summer and we think that yields are fairly attractive at those levels, but again because of the uncertainty around the NAFTA talks we are kind of at wait and see mode at the moment for the local rates in Mexico. We do like the hard currency, again we expect some kind of near term volatility, but we think once we are beyond the NAFTA renegotiation that would certainly be a good opportunity.

Wall: Delphine, thank you very much.

Arrighi: Thank you.

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

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Emma Wall  is former Senior International Editor for Morningstar

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