Latest News 27/03/2019
Could Latin America be the big investment story of the next decade?
Investment Director David Appleton assesses a region that, with one of the world's youngest and fastest growing populations, looks set for economic expansion. Could under-investment over the last decade, coupled with recent political change, provide an exciting opportunity for investors?
For asset allocators surveying the landscape for inspiration, one could be forgiven for feeling a bit jaded and uninspired. In the major developed and emerging economies that really matter in financial markets terms, the current elongated business cycle feels closer to the end rather than the beginning. Demand is still being supported by ultra-loose monetary policy, debt is still being accumulated rather than paid down by consumers, governments and corporates alike, and the longer term fiscal and societal challenges of poor demographics remain largely unaddressed. Bah Humbug!
So what should investors be looking for? Here is a potential wishlist:
- Economies where growth is highly likely to be faster over the next decade than the last
- ‘Normal’ monetary policy with capacity to support growth
- Positive demographics that underpin long-term economic expansion and fiscal sustainability
- Low consumer/corporate/government debt levels that can safely rise to support growth
- High quality, well-run listed companies available on reasonable/cheap valuations
- Unloved by investors – scope for a re-rating
Sound like a pipedream? Benchmarked against the above criteria there is one part of the world that stands out to us, and it is likely to surprise many readers: Latin America.
Investor perception of Latin America, understandably perhaps, remains anchored by the hyper-inflation, currency crises, and guerrilla wars of the 1980s. The recent bailout of Argentina by the IMF, corruption scandals in Brazil and the tragic, chaotic decline of Venezuela certainly reinforce the conventional market narrative that Latin America is highly volatile and fraught with risk. Dig a little deeper however and we believe there is a very different, exciting and positive story to tell.
Consumer industries such as retailing, financial services and healthcare are deeply under-penetrated, providing an exciting multi-year growth opportunity.Let us start with demographics. Latin America has one of the youngest, fastest growing populations in the world. According to UN forecasts*, the working age population is forecast to grow by 18% by 2030, providing a powerful tailwind to growth through rising purchasing power. China’s working age population in contrast is forecast to shrink by five percent over the same period. Consumer industries such as retailing, financial services and healthcare are deeply under-penetrated, providing an exciting multi-year growth opportunity that is at an earlier stage than in other parts of the emerging world. Many of the best franchises operating in these industries are privately owned, well-managed and listed on local stock markets. After years of investor apathy, valuations are low despite high returns on capital, strong balance sheets and structural tailwinds powering long runways of growth ahead.
The political environment, while clearly not homogenous, is undergoing an unmistakable shift from left to right, just as the rest of the world is at risk of going the other way. The transformation of the Chilean economy since the 1980s has provided a template for other nations to follow. Privatisation and deregulation combined with rigorous application of orthodox monetary and fiscal policy has seen Chilean GDP per capita almost triple over the past twenty years while maintaining public finances that are the envy of any major developed economy (government net debt is just four percent of GDP while the UK, US and Japan have built up borrowings equivalent to 78%, 79% and 155% respectively)**. The success of the Chilean development model has not gone unnoticed. Peru has seen growth accelerate strongly after effectively copying the Chilean playbook while Columbia, recently freed from decades of civil war, should be able to make rapid progress as it seeks to catch up with its Andean neighbours. A major investment programme to upgrade the Columbian road network, for example, should unlock huge productivity gains given the parlous or non-existent state of transportation infrastructure currently.
Where China has over-invested over the last decade to sustain its growth rates, Latin America is so exciting precisely because it has done the opposite.
Where China has over-invested over the last decade to sustain its growth rates, Latin America is so exciting precisely because it has done the opposite. Chronic under-investment has held back economic development for decades and there is now the political backing to change this. Faced with the economic reality of failed populist regimes in Brazil and Venezuela, Latin Americans have embraced the centre-ground and economic orthodoxy. Five out of the six major economies have market-friendly, pro-reform administrations. Mexico is the current exception, and time will tell whether Andres Manuel Lopez Obrador, or ‘AMLO’, squanders what should be a golden decade for the Mexican economy now that the NAFTA trade negotiations have been successfully concluded.
There are, of course, still major challenges facing the region. Brazil and Argentina need to push through difficult fiscal measures in order to put their public finances on a sustainable path, and corruption and violence remain persistent challenges yet to be overcome. Nothing is ever perfect, however, and given the challenges facing the rest of the world, investors should perhaps consider giving Latin America another look.
*Source: United Nations / CEPALSTAT, 31 August 2017
**Source: International Monetary Fund, World Economic Outlook Database, October 2018