“Brazil is the country of tomorrow and always will be,” according to a saying that could equally apply to the whole of Latin America. This phrase sums up the perennial overoptimism that is the curse of the region, encouraging belief in a rosy future without tough decisions being taken. Although Latin America’s fortunes seemed to improve last year, 2017 has brought fresh disappointment. Commodity prices have weakened, Brazil’s president Michel Temer has been indicted for corruption and the Chavistas are intent on installing a dictatorship in economically devastated Venezuela. Equity markets have retreated as investors once more shy away.
However, William Salomon of Ocean Wilsons, which has extensive business interests in Brazil, is optimistic about the country. “The key issue is not the survival of Temer,” he says, “but of his programme of necessary reform, notably of labour laws and the bankrupt state-pension system. That looks likely.” He, like most Brazilians, is impressed by the way in which the judicial system has dealt with a very corrupt political class.
The main investment trust in the sector is the £160m BlackRock Latin American Trust (LSE: BRLA). The trust is focused on larger companies and has more than 90% of its portfolio in Brazil and Mexico. Despite a strong absolute return of 25% in dollars, it lagged the MSCI Latin America index by 6% last year, owing to a high exposure to the troubled Mexican market and underperforming in the soaring Brazilian market. Hence the current share price’s 13% discount to net asset value looks well deserved.
There is also the Findlay Park Latin American Fund, managed by Rupert Brandt. The fund returned 24% last year, but followed this with a very healthy 13% in the first quarter of 2017. Brandt’s geographic focus is broader, with 30% of the fund in Argentina, Peru and Colombia, and much less in larger companies. Exposure to the resources sector, which Brandt believes is strategically unattractive, is zero. He estimates that the fund is trading at 14.6 times 2017 and 12.7 times 2018 earnings. The risk, he says, is of further political convulsions in Brazil and/or that the election in Mexico will see the veteran populist Lopez Obrador elected.
Carina Güerisoli of Chilean investment firm Compass, who manages the Investec Latin American Smaller Companies Fund, points out that returns on equity in the region are rising from historic lows, making sustained high earnings growth likely. The fund’s return in 2016 was “only” 21% in dollars, but another 23% was achieved in the first half of 2017. Güerisoli is optimistic about smaller companies in the region, which, she says, usually trade on a premium to larger companies, due to higher growth. She believes that earnings growth of 15%-20% is achievable over the next ten years, 5% ahead of larger companies. This makes returns of 15%-18% compound possible, compared with 10%-12% for larger firms in the region.
Despite this year’s hiccup, the economies of Latin America are picking up, the political backdrop is improving and investors are returning. For those who missed the boat in early 2016, now looks a good time to clamber aboard.
In the news…
► Investors have not taken advantage of the rally in the UK’s smaller-companies sector, says FTAdviser. Despite returning an average of 27% in the 11 months to the end of June, the sector saw outflows of £341m, with Brexit-spooked investors turning instead to the FTSE 100 to try and benefit from foreign revenues. However, investors may have overestimated the exposure of the market to domestic revenues, says FTAdviser, with only 55% of revenues in the MSCI UK Small Cap index coming from the UK.
► The buying of gold futures by hedge funds and other investors has surged a record $19bn over the past month, says the Financial Times. This is probably due to “concern over lofty equity-market valuations and geopolitical tensions with North Korea”. Hedge funds and other speculators have bought a record 474 tonnes of gold over the past five weeks on the Comex futures exchange in New York. Buying only came close to similar levels after the Brexit vote. Over the same period, holdings in gold-backed ETFs, more popular with longer-term funds and individual investors, have seen 35 tonnes of outflows. Gold only ever receives a “fleeting benefit” from geopolitical crises, and so investors “need to be convinced of continued low interest rates in
the US and a weaker dollar”, warns investment bank Natixis.
Activist watch
Paint maker Akzo Nobel has reached a truce with activist hedge fund Elliott Management, says Ben Dummett in The Wall Street Journal. In a joint statement last week the two sides said that they are now in agreement over Akzo’s strategy to spin off its speciality-chemicals business. The deal will “normalise the relationship” between Akzo and its shareholders and suspend all litigation for “at least three months”. Elliott will also back Akzo’s two new nominations to its supervisory board, as well as the appointment of new chief executive Thierry Vanlancker. The deal follows a long dispute between Elliott and Akzo after a prolonged takeover attempt by US rival PPG Industries that Akzo fought off earlier this year.