Investment Adviser:

INCA Investments, LLC

(November 2013)

The US Federal Reserve’s plans on tapering of monetary policy continue to be one of the biggest movers on world markets. If and when the tapering does begin, what effect is it likely to have on Latin American markets?


An increase in US interest rates will continue to put pressure on those currencies in the region where the economic fundamentals are not strong. However, we believe that in general, Latin American economies are in good shape and should not experience further significant currency depreciation.


For much of this year emerging markets as a whole have been struggling with capital outflows. Has Latin America had the same problem and to the same extent as other emerging market regions?


Yes. As developed world growth has picked up, investors have increased their allocations to those countries. Interestingly, foreign direct investors, unlike portfolio investors, have been increasing their investments into the Latin American region for some time.


A World Bank report released in October stated that Latin America, like other emerging markets, is entering a new phase of lower growth dynamics. What will this mean for local markets and investment opportunities in the region?


We believe future Latin American growth will continue to be above average and more internally focused on consumption-based companies as commodity exports decline.


Brazil seems to be losing some of its appeal among investors. Why is this and do you feel the same way?


We have felt for some time that Brazil is experiencing lower economic growth due to its relative lack of competiveness versus goods from other countries. However, the fall in the Brazilian market is providing an opportunity to enter into some of their best consumption companies at reasonable prices.


The country will, however, be hosting the World Cup next year and the Olympics two years later. Is the Brazilian market likely to get a boost from these events?


We expect any benefit derived from the events to be marginal and short term oriented.


You have long been quite vocal on Mexico’s potential, but recent figures suggest the economy has been slowing. Is this a temporary phenomenon or something more long term and if so, how will it affect your management of the portfolio?


We believe that Mexico’s appeal as a manufacturing base to import to the US continues to grow. This is a long term shift which will happen gradually. The current short term weakness has not altered our view on Mexico’s long term attractiveness. We will continue to invest in Mexican companies which we believe will benefit from a long term pick up in Mexican economic growth.


Mexican president Enrique Pena Nieto came to power on the back of economic reform pledges. To what extent have these been implemented and what effect have they had on the market?


Implementation of some minor reforms has begun, but more substantial reforms are still waiting for approval and/or parliamentary passage. Since the reforms are only at the beginning stage, their effect has been very limited.


Chile and Peru, both important markets for the Fund, have also seen sell-offs in recent months, apparently based on concerns about a slowdown in Chinese demand for commodities. Is this something that concerns you?


The fall in commodity prices and its negative effect on Latin America has been going on for some time. The question is if this negative effect has been correctly discounted in the price of specific Latin American companies. In that respect, in particular in Chile and Peru, we are interested in and are focusing greater attention on companies which we feel are relatively defensive to the commodity effect and whose prices we believe have been overly discounted.


You say that the commodity dependence of the region is exaggerated in the minds of investors, but this may be down to the country indexes for Latin American states which are commodity-heavy. In that case, how important are local indexes as a gauge for investors?


Local indexes are an important measuring tool for investors, especially those that are invested in the region via ETFs and index funds. However, it also results in investment generalizations that are not always accurate and create investment opportunities, upon which we hope to capitalize.


What do you see as the prospects for the region over the next three months?


The prospects over such a time frame are not very relevant to our investment style as we have a considerably longer term investment horizon. However, we do feel that in general, Latin American economies are relatively strong and have very reasonable levels of private and public debt. Combined with an improving environment for the region’s middle class, we expect Latin American consumption-oriented companies to perform well in the long term.


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