Investment companies: Latin America is worthy of consideration

Investment Companies

Investment companies: Latin America is worthy of consideration

Brazil and Mexico are two of the best-performing stock markets so far in 2022, but Latin America continues to trade at a large discount compared with other areas. The region can be volatile and is unloved, as evidenced by low index weightings. However, it has a favourable growth outlook helped by robust commodity prices, which have been inflated by the war in Ukraine and companies reshoring their operations away from China. Latin American central banks are ahead of the curve in raising interest rates, while, having worked through a heavy cycle, the political backdrop in the region is more stable than normal following the recent Brazilian presidential election. Hence, Latin America could provide an interesting opportunity for global investors.

While there are just two companies in the AIC Latin America sector – BlackRock Latin American Investment Trust (BRLA), which is an equity fund, and abrdn Latin American Income Fund, whose portfolio is broadly split 65:35 between equities and government bonds – there are other investment companies with meaningful exposure to Latin America. These include: Hansa Investment Company (c 38%, source: Morningstar); Utilico Emerging Markets Trust (c 31%); Fidelity Emerging Markets (c 18%); Murray International Trust (c 15%); JPMorgan Global Emerging Markets Income Trust (c 15%); Templeton Emerging Markets Investment Trust (c 15%); JPMorgan Emerging Markets Investment Trust (c 11%); and BlackRock World Mining Trust (c 10%).

According to BRLA’s managers, Latin America makes up c 10% of the MSCI Emerging Markets Index compared with c 25% 20 years ago. The MSCI Emerging Markets Latin American Index is dominated by Brazil (c 64%) and Mexico (c 26%), while the three largest sectors are financials (c 26%), materials (c 20) and consumer staples (c 15%).

Monetary policy

Latin America has regularly experienced periods of inflation and central banks in the region have moved rapidly to tighten monetary policy in response to rising prices. BRLA’s managers suggest this means they could be looking to reduce interest rates to support demand, just when developed markets are in a tightening interest rate mode. In Brazil, the base rate has risen from 2.00% to 13.75% since March 2021, while the inflation rate has declined to c 7% from c 12% in April 2022; the country’s attractive real interest rate could attract foreign investment. Also, despite higher interest rates in Brazil, its unemployment rate has declined, suggesting latent economic strength.

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