Theadneedle's dominic rossi believes both countries are moving in the correct direction
While approaching exposure to Argentina with caution Latin America fund managers are positioning portfolios towards Mexico and Brazil.
Dominic Rossi, head of Latin America at Threadneedle, has overweight positions in Mexico and Brazil as these countries are both progressing in the right direction.
Rossi said: 'Mexico is favoured as its exports to the US account for 25% of its GDP. Its fiscal and monetary policy is under control and the country has experienced its first normal economic cycle in 30 years. Interest rates have fallen and it is starting to behave like a developed market. The country has also received a low investment grade from Standard & Poor's.'
The Zephr Latin America fund also has overweight positions in Mexico and Brazil, according to research by Forsyth Partners.
Fernando Donayre, portfolio manager of the Zephr Latin America fund, said the macroeconomic situation is supportive in Mexico due to the North American Free Trade Agreement that has increased trade flow between the two countries.
He said: 'When the US economy picks up it will be positive for the country. We favour consumption-orientated companies such as beverage and retail ones. These companies will be the beneficiaries of consumption growth.' However, Rossi said that Brazil is a little harder as it has a presidential election this year. But the good news is that the Brazilian economy has de-coupled from Argentina and it has been well managed. The country is showing strong signs that there will be a balance of payment surplus and interest rates are likely to fall. In addition, the currency has remained stable.
In both these countries Rossi favours the banking and consumer industries. He likes banks because they are at the beginning of their credit cycle, rather than the end. On the consumer side companies have a dominant position in the market ' with high quantities of cashflow and companies that are undervalued.
Donayre warned that Brazil does not have the benefit of free trade with the US as it does not have the same proximity to the country as Mexico. He said the leading candidate in the Brazilian election is populist and anti-reform. Donayre said it would be a mistake for the Brazilian economy to go back to a populist political environment.
The Merrill Lynch Latin America Portfolio also has overweight positions in Mexico and Brazil, but underweight positions are found in Argentina and Chile. However, Orlando Muyshondt, who manages the fund, uses a bottom-up stock-picking approach.
Muyshondt does agree that Mexico's economic stability gives it an advantage over other countries in the region and he favours the beverage sector within this market as it is cheap by historical standards.
He said Brazil has good value but is riskier than Mexico and has a dangerous sovereign debt situation. But Muyshondt does not favour one country over another. He has heavy weightings in Mexico and Brazil because company valuations are cheap. He also holds companies in Argentina and Chile despite their poor economic climates. If he found companies he liked in those countries he would buy them despite their situations, he said.
In Argentina, Donayre has just started buying. For example, he favours the company Quilmes as it has a strong financial position, good market share, and is likely to weather the recession and is also listed on the Luxembourg exchange.
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