Why LatAm is the place to invest in right now
But with risk comes reward: there is a great deal of opportunity to generate alpha in emerging markets, though this relies on the careful identification of macroeconomic trends.
One promising region is Latin America (LatAm), and specifically Argentina – a country long shunned by investors.
The election of Mauricio Macri in 2015 was a clear positive for the country and brought an end to a dark period of isolation since its default in 2001.
The new President’s top challenges were the country’s balance of payments and historic fiscal deficit. Argentina spent years grappling with such a scarcity of dollars that it was finally compelled to introduce capital controls.
Mr Macri’s administration has delivered on its promises and things are moving in the right direction.
Among the positive steps, the Macri-led government has removed restrictions on foreign exchange transactions imposed in 2011, liberalised the exchange rate, lowered the country’s primary deficit and significantly reduced subsidies.
This has caused a significant improvement in the macroeconomic fundamentals of the country.
GDP growth is accelerating, with industrial production and construction activity posting respectively a 6 per cent and 20 per cent year-on year growth. Inflation is down, and the balance of payments is improving with a very strong capital account.
These positive developments look set to continue under a stable government led by Mr Macri, following the recent elections which solidified its position in the lower house and Senate.
This result ensures the President will be able to carry on his pro-market reform agenda and thus improves visibility for the next two years, and potentially even longer if he is re-elected in 2019.
In terms of sectors, Argentinian banks present one of the best growth opportunities in the LatAm financial sector.
Indeed, the normalisation of the financial sector’s regulatory framework, combined with an underpenetrated and fragmented banking system, provides significant growth opportunities.
Private-sector lending in Argentina is equal to a mere 15 per cent of GDP, a negligible level by comparison with other emerging markets. With an improving GDP and falling inflation and interest, we expect loan penetration to rise significantly in the coming years which will benefit Argentinian banks.
This positive movement in the LatAm region is not limited to Argentina.
Mexico was excessively punished last year following Donald Trump’s election. Now, after a few months, with a depressed market and a devalued currency, we believe that the market got it wrong.
The US needs Mexico, and we believe the Trump administration has realised the NAFTA agreement is good for the US. In light of these events, we are sticking to our cautious, yet optimistic view on Mexico.
Brazil is a more complicated case because its currency is rather expensive and the equity market is not particularly attractive.
However, its bond market is interesting, with some of the highest returns among emerging economies. Longer term, the country continues to offer investment opportunities as on the macro front, so conditions are favourable.
These developments have increased the size of the investment world for those willing to embrace these opportunities.
Traditionally, investors in emerging markets stick to the MSCI Emerging Markets index, though it is clear that this limited position does not allow investors to take advantage of the opportunities in countries such as Argentina where alpha can be realised.