27.02.2015

Investing in Latin American equity markets, the WIOF Latin American Performance Fund offers investors access to a region of strong growth, solid fundamentals and burgeoning investment opportunities.

 

WHY LATIN AMERICA?

Latin American economies have grown faster than their developed peers when considering the growth for much of the Fund’s investable universe – Brazil, Mexico, Chile, Colombia, and Peru—which had an average GDP CAGR of 3.8% between 2008-2013, compared to flattish to negative growth for economies like the US, UK, and Japan. And yet, the long-term, structural growth outlook for the region remains more robust than that of its developed peers. While each individual Latin American economy still has its own challenges to overcome, overall much has been done to right the wrongs of past decades. One bright spot to highlight is the significant reduction in public debt levels, with the Fund’s target countries now meaningfully under-levered compared to their developed peers. Based on 2013 data, Brazil has the highest public debt to GDP level in the region, at almost 60%, but still well below the US’s 72%. Peru and Chile have the lowest debt levels, both with less than 15% of GDP. The region is even more under-levered than developed peers when looking at total debt levels to GDP (i.e. including private debt). Additionally, economic growth is not expected to be commodities-driven as was the case in the 2000s. Rather, the key investable countries in the region have strengthened the overall foundation of their economies, making them less sensitive to the effect of commodity price drops. These countries have increased the role domestic consumption plays in their economies and this theme continues to gain momentum.

 

As the Fund’s portfolio manager, Fernando X. Donayre, says: “Over the long-term, Latin American economies’ strong underpinnings bode well for the region’s investment prospects.”

Expected GDP Growth

 

2015

2016

2017

2018

5-Year Growth

 

Annualized

USA

3.00%

3.00%

3.30%

2.90%

2.80%

United Kingdom

2.50%

2.00%

2.10%

2.50%

2.40%

Japan

1.20%

0.90%

1.20%

1.10%

1.10%

Brazil

1.70%

2.60%

4.20%

4.20%

2.80%

Chile

3.80%

4.30%

4.60%

4.60%

4.10%

Colombia

4.80%

4.70%

4.50%

4.50%

4.60%

Mexico

3.80%

3.90%

3.30%

3.30%

3.40%

Peru

5.60%

5.50%

6.00%

6.00%

5.70%

LatAm Simple Average

3.90%

4.20%

4.50%

4.50%

4.10%

Source: Bloomberg/IMF

COUNTRY BY COUNTRY

Brazil: The long-term outlook for Brazil is highly constructive, as in recent years its middle class and aggregate purchasing power have both greatly increased and should continue to underpin multi-year growth. Brazil has a stronger economy today than it did a decade ago and its fundamentals are supportive of companies with very strong business franchises across a broad range of domestic sectors—such as those tied to consumption or increased economic formality (e.g. technology, banking services).

 

Mexico: In Mexico, the reforms being undertaken by President Peña Nieto’s administration could further catalyze the country’s economic growth and are supportive of a very promising multi-year economic backdrop. Mexico has an improving economy whose long term prospects are significant. Importantly, the country has the most undervalued currency in Latin America and one of the most competitive manufacturing sectors in the world.

 

Chile: Chile should remain the best managed economy in Latin America with excellent long term growth prospects, as its government has done more than any other to improve the size and spending power of its middle class.  However, value investors in Latin America know that, historically, the shares of Chilean companies always came at the expense of the highest valuations in the region. Now, with investors placing too much emphasis on the correlation between Chilean economic prospects and moderating copper demand in China, equity valuations are looking more fundamentally attractive.

 

Colombia: Under an improved security outlook, the Colombian economy is experiencing solid growth. Meanwhile, a market decline during 2013 brought down asset prices, providing an opportunity to find attractively priced investment opportunities. One particular area of interest is the increase in infrastructure spending taking place in Colombia, as the country has begun to embark on the most ambitious infrastructure programme in its history.

 

Peru: The Peruvian growth story has been one of the most compelling in the Latin American region during the past few years, with high growth rates, low inflation and a commitment to market-friendly policies. The political environment has improved as left leaning President Humala has acted very pragmatically. Peru is expected to be the fastest growing country of the primary Latin American markets in the near future, with Peruvian companies benefitting from this rapid growth.

 

Panama: One of the fastest-growing economies in the region with, according to IMF estimates, 2014-15 GDP CAGR of 7%, it is a growing regional headquarters base for multinational companies and offers opportunities in companies that are attractively valued and with healthy fundamental outlooks.

 

Argentina: Often overlooked by investors amid concerns over the country’s economy and political regime, presidential elections in October may finally bring regime change. Some companies are already trading at very low valuations, particularly if a shift in economic/political direction for the country is factored in and the risk:reward ratio is compelling on a multi-year outlook.

 

GEOGRAPHIC BREAKDOWN

 

 

OUTLOOK

Brazil’s economic outlook in the next couple of years is likely to be a challenged one to a degree. As such, the portfolio has been positioned accordingly with the portfolio manager investing in companies with a strong fundamental outlook and which are attractively valued. In Argentina, while regime change is a real possibility this year, there are likely to remain some significant hurdles to any political and economic turnaround in the country so any significant transformation is likely to be gradual. But even a modest economic improvement over the next few years may spell outsized investment returns. Elsewhere, Panama should continue to offer good opportunities among attractively-valued and fundamentally healthy companies. In Peru, the improving political climate suggests that local companies will be able to benefit from subsequent rapid economic growth and in Mexico, recent bold economic reforms and a resurgent manufacturing centre are at the centre of a bright investment outlook. In Chile, equity valuations look fundamentally attractive as many investors overestimate the effects of moderating commodity demand from China on the economy. Meanwhile, the Colombian economy is growing steadily and there are attractively priced investment opportunities.

 

INVESTMENT ADVISER

The Fund’s investment adviser is Latin American investment specialist INCA Investments. INCA is comprised of a group of dedicated regional investment professionals including senior investment staff who have been investing in Latin American markets since the early 1990’s as well as a team of seasoned analysts who are specialists in the region’s most important sectors. Its AUM as of May 2014 stood at USD 750 million.

 

 

IMPORTANT NOTE: This report has been prepared for information only, and it does not represent an offer to purchase or subscribe to shares. World Investment Opportunities Funds (“WIOF”) is registered on the official list of collective investment undertakings pursuant to part I of the Luxembourg law of 17 December 2010 on collective investment undertakings as an open-ended investment company. WIOF believes that the information is correct at the date of production while obtained from carefully selected sources considered to be reliable. No warranty or representation is given to this effect and no liability can be assumed for the correctness or accuracy of the given information which may be subject to change at any time, without notice. Past performance provides neither a guarantee, nor an indication of future performance. Value of the shares and return they generate can fall as well as rise. Currency fluctuations, either up or down, may also affect value of the investment. Due to continuing market volatility and exchange rate fluctuations, the performance may be subject to significant changes over a short-term period. Investors should be aware that shares in the financial instruments entail investment risks, including the possible loss of the invested capital. Performance is usually calculated on the basis of the relevant NAV unless stated otherwise. Performance shown does not take account of any fees and costs associated with subscribing or redeeming shares. It is assumed that all dividends were reinvested. WIOF prospectus is available and may be obtained through www.1cornhill.com. Before investing in any WIOF Sub-fund(s) investors should contact their financial adviser/legal adviser/tax adviser and refer to all relevant documents relating to the WIOF and its particular Sub-fund(s), such as the latest annual report and prospectus that specify the particular risks associated with the Sub-fund, together with any specific restrictions applying, and the basis of dealing. In the event investors choose not to seek advice from a financial adviser/legal adviser/tax adviser, they should consider whether the WIOF is a suitable investment for them.