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more tough nuts to crack

The region accounts for almost 4% of the earth’s surface; it is made up of some 19 countries, excluding Brazil; it is rich in natural resources and a major exporting region over and above domestic consumption.

Many professional investors have been committed to the region for some years, but very recently the weakening global economy and a downturn of demand for base metals has taken its toll. The recession in western economies has meant many Latin American countries have reported lower – if arguably still respectable – growth numbers. However, recent signs are emerging that many of the individual countries are now slowly recovering.

Huge potential

Putting Brazil to one side, the longer-term prospects for Latin American economies remain attractive, due to their high economic growth potential, a global demand for commodities, their investment into infrastructure and general demographics.

Mexico City is one of the world’s largest cities and the Gulf of Mexico has vast oil reserves and is one of the world’s largest oil producers. Indeed, Mexico has been identified for potential future growth by Goldman Sachs Asset Management in its recent Next 11 research paper. Mexico appears to have recaptured the competitiveness it lost to China over the past decade, recently leading to a number of major US companies making substantial investments in Mexico.

Southern South America – Paraguay, Chile, Argentina and Uruguay – comprises a vast land mass with very fertile plains where huge quantities of wheat and agricultural commodities are produced, as well as being the breeding ground of cattle for beef exports, which is a major source of income for Argentina and Uruguay.

Protected by the Andes, Chile it is famous for its fruit, cereals, grapes and its wine industry. Similarly, it is one of the world’s largest exporters of copper but also mines significant quantities of iron ore, coal, gold and silver.

Likewise, Colombia and Peru are investable, with the former famous for its mining of emeralds and, of course, coffee exports. Finally, there is Venezuela. Heavily dependent on the oil price due to its huge reserves, the country is likely to experience an uncertain period politically and economically, due to the recent death of President Hugo Chavez.

In terms of the current outlook for the region, while the positive start in global equity markets for 2013 has been supportive, the Latin American stock markets have been mixed and, in Brazil’s case, disappointing.

Summary

Latin American fund exposure is often heavily biased towards Brazil though recent economic indications point to greater opportunities across the region as a whole.

As long as there is a demand for commodities – from oil to wheat to coffee to wine – attractive investments will exist across the 20 countries.

Political, social and some structural risks remain but as the global economy shows signs of (admittedly slow) sustainable growth the region will benefit as a whole.

Good long-term prospects

However, it has to be said that the longer-term outlook for the region looks much more positive, with equity valuations looking fairly cheap on a historic basis and multiples below their historic averages.

Prospects for the region look exciting, due to better macroeconomic fundamentals, and a rise in demand for natural resources. In terms of domestic fundamentals, there will be a continuation of infrastructure spending, and rising personal income levels, leading to greater consumption, and a healthier outlook for domestic companies.

Finally, in each of the past eight years, economic growth in Latin America has been much healthier than that of Europe, and is likely to be so again in 2013, which in turn should make it the world’s second-best performing region behind Asia.

Problems such as inflation and political risks are always going to be associated with the area, but future democratic elections, structural reforms, and a recovery in the global economy should benefit Latin America and, of course, its investors.

tom@ybc.tv

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