Investors say ‘hola’ to Latin America

There are good and bad countries in South and Central America for investors.

The good countries, such as Brazil, have sophisticated markets with good companies that are attractive to investors.

On the opposite side of the fence, countries such as Nicaragua have virtually no stock markets and shares in companies are sold over the counter. These countries also have rather unstable political systems that spook investors.

Despite the wild extremes of South and Central American markets, Aberdeen Asset Management is a big fan of the region for its emerging markets portfolio.

Aberdeen associate director of business development Stuart James said there are good companies in the region and some emerging markets fund managers ignore this.

“It is important you do your homework on the region and physically go down there and look at the companies,” he said.

James said Central America was being ignored by almost everybody, but again, Aberdeen was bullish on some companies in Mexico.

Of the South American countries, Brazil is Aberdeen’s favourite, as it has potential to grow further.

“Brazil is looking to cut interest rates, which will enable companies to borrow with certainty,” he said.

“This should also stimulate consumer demand, which will be good for local manufacturers.”

The MSCI Brazil Index has reported 30.66 per cent growth (based on US dollars) in the year ending July, 2007.

James said Brazilian companies such as Petrobras were very attractive to investors, as it has delivered 20 per cent dividend growth in the past five years.

“This compares to Exxon’s dividend growth over the same period, which is 7.1 per cent,” he said.

“Petrobras has larger oil reserves than Exxon, with many of them in shallow water, which makes soil extraction very cheap.

“The attraction of Petrobras is that it is half the price of Exxon and offers twice the yield.”

James said while fund managers scramble to buy Exxon shares, Petrobras is off the radar for most.

“The Brazilian Government owns half the stock, and we have held Petrobras for 20 years because it stacks up against any major Western oil producer,” he said.

Aberdeen also favours Chile, with the country’s major airline LAN Chile in the portfolio of its Emerging Opportunities Fund.

“The company leases all its aircraft and has a good safety record while also being a major carrier in the region, so it is attractive to us,” James aid.

“We went to see them and the research enabled us to make the decision to put the company in the fund.”

James said without this face-to-face research, it is very easy to pick the wrong companies in the region and get burnt.

In Central America, Aberdeen favours Mexico, with investments in the country’s largest Coca Cola bottler and Sol beer brewer FEMSA as well as the operator of Cancun airport, which is a major tourist destination in North America.

“You can find good quality companies in Mexico that trade at a 10 per cent discount to the rest of the world,” James said.

The negative countries from an investor perspective in South and Central America are Venezuela and Bolivia, which have governments looking at re-nationalising companies, especially in the oil industry.

“These countries don’t run their economies very well, using tax revenues to fund tax cuts,” he said.

“This compares to a country such as Chile, which has its own stock market and a developed pension market.”

ING Investment Management includes Argentina, Brazil, Chile, Colombia, Mexico and Peru.

These countries account for 85 per cent of the MSCI Latin America Index, according to ING director of emerging markets equities Jan Wim Derks, and is the region of preference for the Dutch fund manager.

“The region is benefiting enormously from the current boom in commodities,” he said.

“Brazil is one of the world’s biggest exporters of iron ore, soya, sugar and orange juice, Chile possesses large copper reserves, Peru has gold and copper and Mexico has oil and copper.

“High commodity prices have given these economies and corporate profits an enormous boost.

“And there is no end to this in sight, which is the reason for our upbeat view of the region.”

However, not all Latin American countries are on ING’s radar.

“Guatemala is not yet on our radar as there is no stock market of any importance,” Wim Derks said.

“We avoid markets like Venezuela, Bolivia and Ecuador where leftist governments are nationalising companies and are acting both anti-democratic and anti-free market.”