An attractive outlook
This challenging scenario could well be the medicine that Brazil needs to begin to deliver on its potential. We saw in 2003 as Lula came into power that investors are willing to look through a difficult near -term outlook if policy makers are taking steps in the right direction: the market doubled in spite of a negative GDP print and rising rates. A glance at Mexico illustrates this more recently; economic activity has disappointed with 2013 GDP growing just 1%. However the market has moved higher in anticipation of the positive effect of the wide ranging reform agenda touted to add as much as 1.5% to normal growth rates of 3% by 2016. We are seeing some signs of investment activity picking up and Mexico remains a core over weight in the Fund. Government promises in Peru and Colombia are also coming good as large infrastructure investment programmes are being implemented which should stain economic growth and offer support even as commodity prices decline.
Opportunities in Brazil
While the investment risks for Brazil are well known, this should not preclude a decision to invest in Latin America. For all its woes, Brazil remains the fourth largest market in the MSCI Emerging Markets Index and we sense that there is a lot of money on the sidelines waiting to return to the country. There are pockets of the economy where investors are aligned with the government: infrastructure and logistics have been a bottleneck for y ears, and although delayed, new projects and concessions are starting to materialise. Education will likely be a vote winner in the elections, and higher education providers have been some of the best performers of the last three years. The consumption story has not expired just yet. Moreover, investors are now benefiting from nascent sectors such as airline loyalty programs, pharmacies and banc assurance. Our meetings with companies across all sectors have highlighted a renewed focus on cost-cutting and returns on investment, both extremely important if we are to face a period where double-digit top-line growth is challenging. We currently forecast 17% earnings growth for our Latin American portfolio in 2014 and 2015 with select Brazilian names contributing significantly to this. The political polls, the weather an d the football may be responsible for short term s wings in the markets in the coming months, but for longer term investors the fundamental reasons for investing in the region may be about to take a turn for the better.
