Brazil and Columbia head Latin America investment prospects, analysts claim

Written by Ray Clancy

Tuesday, 18 May 2010 08:32

Latin American equity market valuations are no longer at bargain basement levels but the region continues to offer good investment value given the strong prospects for economic and corporate earnings growth, it is claimed.

Brazil and Columbia offer the most stable economic and political frameworks, according to Dean Newman, head of emerging market equities at Invesco Perpetual.

For Colombia, the catalyst for change has been the much improved security situation in the last eight years, during President Uribe’s term of office. ‘I expect that improved situation to be maintained under his successor. One concrete result is that the oil and gas industry has a safer environment for exploration and production. Oil companies that were reluctant to get involved in Colombia, despite its excellent geology, are now much happier to do so. For us as investors, we see a much more welcoming approach,’ he explained.

One of Brazil’s great strengths is that it is rich in a wide variety of natural resources including iron ore, gold, manganese, timber, hydro electric power and almost every type of agricultural product and it is also the most populous country in Latin America, with a population estimated at 197 million in 2010,’ he points out.

‘The key to the realisation of its potential, especially over the last 10 to 15 years, has been a massive improvement in economic and political stability. As recently as the early 1990s, Brazil was in the grip of hyperinflation. That meant consumers and businesses were completely unable to plan ahead, not knowing what the value of the currency would be in a few hours, let alone several years,’ said Newman.

But as inflation has tumbled, so have interest rates. ‘For companies, more stable economic conditions have meant the equity and bond markets have opened up as a source of finance. For households, credit has become cheaper and more easily available. All this has been helped by the fact that Brazil’s banks have been cautious in their lending and are financially sound,’ he added.

There is a risk of higher inflation but if it can be kept in a range of 4 to 8%, with interest rates in a range of 7 to 12%, that will cement Brazil’s successful transition to a stable, low inflation, low interest rate economy, Newman believes.

Debt should not be a worry as public sector debt in all the major Latin American economies is below the 90% ‘tipping point’ identified in recent research by Reinhart and Rogoff at which economic growth prospects are hit.

Newman cites Chile as one example of public sector fiscal responsibility. ‘Notably, revenues from the high copper price of recent years have been saved and the main copper company is state owned, strengthening the government’s financial position. The government now has little net debt, only 9% of GDP,’ he said.

The outlook is robust. ‘In particular, their success in reducing government debt levels means they are in a much stronger position, in this respect, than many developed economies. After the strength of Latin American equity markets in the last year or so, valuations based on historic, actual earnings are no longer cheap. But, on the basis of expected earnings, valuations are still attractive compared to the developed world,’ said Newman.

‘We believe Latin American markets still offer good value given the prospects for stronger economic and corporate earnings growth than in the developed economies, coupled with an environment of greater economic stability,’ he added.