27.03.2013

Investment Adviser:

INCA Investments, LLC

(April 2013) 

Despite Brazil having been touted for many years as the region’s economic powerhouse and prime investment destination, your investment strategy over the last year has often involved preferring Mexico over Brazil. Why? 

After sub-par 2.1% economic growth for the last decade, Mexico has become a beneficiary of increased competitiveness in exporting manufacturing goods to the US. Fast-rising, productivity-adjusted wages have precipitated a shift in manufacturing away from China and other Asian countries. Proximity to the US and a weak Peso has made Mexico a preferred destination in this shift in manufacturing production. Meanwhile, Brazil is struggling with low industrial growth due to its lack of manufacturing competitiveness. 

Some investors have raised concerns over Brazil’s current economic strategy. Do you think these worries are well-founded and if so, what effect does that have on investment opportunities there? 

While Brazil has short-term economic hurdles to overcome we remain optimistic about its long-term growth and prospects. We continue to find good investment opportunities that excessively discount short-term macroeconomic concerns. 

Mexico’s new president recently took office promising economic reforms and to open up key sectors to private sector companies. How realistic are the chances that these reforms will be implemented? 

Newly-elected President Nieto should have a better chance than his two predecessors. The President’s party has a strong position in Congress and there appears to be plenty of political will to implement reforms. However, while political reforms are a welcome positive, the main investment driver in Mexico continues to be its increased export competitiveness. 

Mexico has strong trade ties with the US and benefits from its geographical proximity to the world’s largest economy. Is there any concern that the economy is too reliant on its links with the US? 

Although a main destination of Mexican exports, the percentage of exports to the US has been slowly declining. Often overlooked is the fact that Mexico has the most free trade agreements of any country in the world. Nonetheless, we consider it a plus to have part of the portfolio invested in a country that can benefit from its ability to increase exports to the US. 

Brazil and Mexico are most often mentioned in discussions about investing in Latin America. Are investors seriously missing out if they do not look at smaller countries in the region, such as Chile, Peru and Columbia? 

We believe so. These smaller countries are not only expected to have some of the highest growth rates in the region, but also have different drivers to Brazil or Mexico. 

Growth rates for this year for the Latin American region as a whole are predicted to be above those in the US and most developed countries. But to what extent are economic growth rates an indicator of investment opportunity in the region and how much of a part do they play in your investment strategy? 

A strong economic backdrop will have a positive impact, as the benefits of above average growth will flow through to individual companies. That being said, our search for investment opportunities is still determined by our analysis of individual companies.  

Some investors seem to treat the region as one homogenous whole and make ‘Latin American’ investments based on extending their view of one country’s market to the entire region. How serious a mistake is this? 

Latin America’s different economies have varying investment drivers. Treating the entire region as homogeneous would be a misguided generalization that can result in missed opportunities.  

Some investors tend to steer away from Argentina because of perceived political and other risks. What is your view on investing in Argentina? 

There needs to be a change in the economic management of the country by the political class, which could happen over the next few years. We continue to track Argentina, spending time visiting local companies and doing our homework so we are prepared when the opportunity arises. 

To what extent do you think the investment environment in Latin America has improved over the last year and are there any specific areas where this improvement has been dramatic? 

Latin America’s economies and capital markets continue to develop and display long-term potential. The most recent example of a rapid change has been the Mexican manufacturing story, with manufacturing exports growing 17% per year in the last three years.  

Are there any reforms planned in the near to medium-term in the region which are likely to provide more or better investment opportunities? 

Mexico has demonstrated greater political will to enact reforms, including recently passed labour laws, so there is positive momentum there. We should highlight, however, that although market-friendly reforms are welcome, we focus on investment opportunities that are not reliant on government action. 

How do you see the prospects for Latin American markets and economies in the next six months?  

Although short-term prospects appear very favourable, an unpredictable global event could greatly affect the short-term outlook. However, we remain confident that over the long-term Latin American economies’ strong underpinnings bode well for the region’s investment prospects.

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