Investment guide: Latin America

Published by Rob Griffin on 15 April 2015.
Last updated on 15 April 2015

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But although this can make Brazil, Mexico and Chile exciting holiday destinations, it doesn't automatically mean they make sense for investors looking to find a home for their hard-earned cash.

Jason Hollands, managing director of Tilney Bestinvest, agrees. Casting romanticised notions aside, anyone looking to commit money to this part of the world must have a thorough understanding of what they are actually buying, he says.

"One of the issues to consider if mulling a Latin American fund is that, in effect, you are largely buying Brazil, since it is about 71% of the index, followed by 13% to Mexico," Hollands adds. Such exposures, he suggests, might not be the wisest idea.

"The Brazilian economy is slowing, GDP forecasts having been progressively cut, inflation is rising at a time when it is subdued across the globe, and unemployment is also on the rise," he says. "The political picture isn't great either."

He argues that the direction of policy under Dilma Rousseff, Brazil's president, has become increasingly market-unfriendly, while the government is also facing resistance to its well-publicised austerity plans.

"Like a number of other emerging market economies, it is quite exposed to commodity prices and commodity demand across the globe is fragile, as China slows," he adds. "With the US having ended QE and the dollar strengthening, that's also pushing the cost of capital up for emerging markets that have borrowed heavily in dollars."

There are certainly reasons to be concerned about Latin America, not least of which is its high dependency on commodities and natural resources, according to Patrick Connolly, a certified financial planner at Chase de Vere.

"The region performed incredibly well during the commodity boom although it has been in the doldrums in recent years as commodity prices have fallen," he says. "It also suffers from poor infrastructure compared with the Western world."

This situation was highlighted in January when Latin American equities fell on the back of persistent concerns about declining oil prices and a wave of disappointing economic data coming out of China.

Other potentially negative factors include inferior corporate governance and greater political risks, the latter having been evidenced by a number of elections in recent years, which has resulted in little certainty about the direction of economic policy.

"While stock prices are arguably at attractive levels, there doesn't yet appear to be any real catalyst to improve performance with commodities prices still low, economic growth still sluggish in many countries and some doubts about the prospects for China," adds Connolly.

There are certainly major drawbacks as far as Latin America is concerned – especially considering the disparate group of economies it includes but it doesn't automatically mean that funds investing in this region should be ignored. In fact, industry observers also expect countries in the region to develop strongly over the next decade.

It's a point acknowledged by Mark Dampier, head of research at Hargreaves Lansdown, who highlights a young, enthusiastic workforce, better education, improving infrastructure and a rich variety of resources as factors contributing to economic growth.

In addition, a number of Latin American governments have strengthened their financial and political systems in recent years, while their debt levels are more manageable than much of the heavily indebted West.

Political instability, corruption, and inflation are all risks, he concedes, but they are in many emerging economies so these have to be put in context. Whether they are suitable for individual investors, he points out, depends on their circumstances.

"A long-term investment horizon is certainly essential, and funds investing in this region tend to appeal to adventurous investors with well- diversified portfolios," he adds.

Those who want to get exposure have a choice. While Latin America doesn't have its own sector in the eyes of the Investment Association, the relatively small number of funds dedicated to this region can be found within Specialist.

The first option is to buy into one of these funds.This will give you more of the upside should Latin America perform well over the coming years, although you'll need to examine the investment goals and approach of the manager at the helm before you buy.

However, given the more volatile nature of such investments, it may be prudent for everyone - bar those with a high tolerance to risk – to consider a broader emerging markets fund that will embrace Latin America as well as other regions.

Consider investing in this sector if…

  • you are looking to diversify your existing exposures
  • you want dedicated exposure to Latin America
  • you are confident of the prospects for Brazil improving

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