The background of steady, largely synchronised global growth coupled with low-to-moderate inflation ...
The background of steady, largely synchronised global growth coupled with low-to-moderate inflation provides a comfortable background against which Latin American markets can perform. The region's GDP growth prospects for this year and next should exceed 4%, regional inflation is low and falling, and EPS growth should average 15-20% in dollar terms. At 10 times 2000 earnings, the region's market multiple is undemanding both on an absolute and relative historical basis.
The Latin American Investment Trust remains fully invested with the bulk of it assets in Mexico and Brazil, largely avoiding the smaller markets due to a combination of a less attractive near-term macro economic/political outlook and liquidity concerns. Mexico is following a path of convergence with the US economy and should provide outstanding returns for investors going forward.
Of the top 10 worldwide destinations for US corporate investment over the last decade, Brazil and Mexico rank first and second respectively, attracting 26% of the total or over $66bn.
Foreign direct investment flows are becoming more structural in each country, lessening dependence on portfolio flows. A growing number of US and European investors are using Mexico as a backdoor to the US market, or, in the case of US companies, as the manufacturing base to attract the rest of the world. Manufacturing in Brazil is seen as the entrance to South America.
Mexico's president elect is a reformer who will take Mexico further along the path of convergence with the US. In Brazil the recent vote on fiscal reform law surprised investors by its degree of political consensus, as well as the timetable for its implementation. The Kapaz law aims to protect minority shareholder interests in Brazil.
But after attempts at reform in the mid-1990's, Venezuela's President Chavez has reverted to the interventionist/populist economic policies which traditionally dog this oil-rich country.
Both in 1994 and 1997, Federal Reserve tightening cycles helped to spark the reversal of capital flows, which subsequently sent the region into recession. Latin America external debt-to-GDP ratios stand at 44%, up from 39% in 1993. Most recently this reflects the currency weakness in the last two years which has swelled external obligations. Compared with the last two cycles, Latin America has not received heavy inflows of debt. So while the region's need for capital flows continues unabated, the nature of these flows has changed so that the overall sensitivity to US rates has probably fallen.
Despite diversifying its non-traditional exports, Latin America still has a cyclical commodity bias which affects the regional trade balance. It is currently benefiting from higher commodity prices for oil, copper, pulp, and soft commodities.
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