Look For Hidden Investment Gems In The Gloom And Doom About Latin America

By: Mayra Rodriguez Valladares

Latin American capital markets have lagged due to the slow roll out of the COVID vaccine.
Latin American capital markets have lagged due to the slow roll out of the COVID-19 vaccine. GETTY

Sustained economic recovery is not coming to Latin America until government leaders can get COVID under control. However, it is important for investors to focus not only on near-term COVID vaccination and economic challenges. Precisely because Latin America has lagged other emerging market regions in the economic recovery, with good credit and market risks due diligence, investors can find good opportunities in Latin American fixed income, equity, and foreign exchange markets.

Earlier in the year, S&P Global revised its 2021 growth forecast for the six major Latin American economies to 4.9%, from 4.1%; this would be a significant improvement after an almost 7% decrease in 2020. Before the pandemic, structural economic challenges plagued Latin America; hence this region is likely to recover more slowly than other emerging market regions.

Latin America: GDP Growth and S&P Global Forecasts
Latin America: GDP Growth and S&P Global Forecasts S& P GLOBAL MARCH 25, 2021


As long as the Federal Reserve does not raise interest rates, foreign exchange investors can find good opportunities in Latin American foreign exchange markets especially in Mexico and Brazil. Rising oil prices are also helping commodity rich countries like Mexico and Peru.

Latin American fixed income markets took a beating last year. According to Moody’s Investors Services’ analysis, fourteen companies it rated in Latin America & the Caribbean region defaulted in 2020. “Consumer transportation has been one of the sectors most significantly affected by the coronavirus shock given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. Seven out of the fourteen defaults were from Argentina, which has experienced a long economic recession, high inflation and currency shocks, compounded by the pandemic-led global economic contraction.»

COVID crisis defaults exceeded the spike during the 2009 global financial crisis
COVID crisis defaults exceeded the spike during the 2009 global financial crisis MOODY’S INVESTOR SERVICES

I believe, and am hopeful, that the worst is behind us in Latin America. As vaccinations increase and industry recovers, default probabilities for many issuers should decline.

Trailing 12-month speculative-grade default rate
Trailing 12-month speculative-grade default rate in Latin America & the Caribbean will decline in … [+] MOODY’S INVESTORS SERVICES

Latin America has been the stock markets underperformer. Yet, for anyone with a good risk appetite and risk absorption capacity, Latin America is the area to look for good opportunities. For example, the construction sector in Latin America is poised for a strong recovery. It is likely to have the highest construction industry real growth rate of any region in 2021, 13.1% year-on-year; this is primarily due to the scale of its contraction during 2020 amid the Covid-19 pandemic. According to Fitch Solutions, “this places Latin America ahead of Asia, which we currently forecast to grow by 7.5% y-o-y in 2021 after seeing its real growth flatline at 0% y-o-y in 2020. Sub-Saharan Africa (SSA), meanwhile, will be the third-fastest growing region in 2021 with real growth of 6.4% y-o-y currently forecast.”

Latin America To Exhibit Greatest Growth
Latin America To Exhibit Greatest Growth Bounce-Back In 2021 Year-On-Year Global – Construction … [+] FITCH SOLUTIONS

Another important sector for investors to analyze is pharmaceuticals and healthcare. In comparison to continental Europe and the U.S., healthcare spending across the Latin American region remains low. Local pressure continues to mount for increased levels of public expenditure on healthcare services. Potentially intensifying social unrest will pressure public officials to spend more on healthcare in the region.

Headline Regional Pharmaceuticals & Healthcare Forecasts
Headline Regional Pharmaceuticals & Healthcare Forecasts (Latin America 2019-2025) FITCH SOLUTIONS

It is important to remember that Latin America is commodity rich. As Latin economies pick up, there will be an increased demand for oil and gas. A good place to look is at stated owned energy companies whose bonds have government backing.

Latin America - Key Oil & Gas Sector Data (2018-2024)
Latin America – Key Oil & Gas Sector Data (2018-2024) FITCH SOLUTIONS

Fossil fuels are not the only energy investment opportunity in Latin America, so is the renewable energy sector. Plenty of sun, hydro and wind resources means that long-term investors should look at this part of the energy sector. Importantly, renewables have multilateral developments banks’ support.

Wind Power Capacity To Expand In The Region
Wind Power Capacity To Expand In The Region FITCH SOLUTIONS

Investments in technology and internet companies, be it via stocks or directly, also merit focus by long-term investors in Latin America. Unlike internet penetration levels in the United States, Canada, Mexico, Panama, and Brazil, the rest of the Americas lags. Investments in Latin American tech and internet stocks would add good diversity to an emerging market portfolio. 

For investors with a long-term investment horizon, alternative investments should definitely be part of the portfolio. A continually growing middle class and promising pension reforms means that there is increasingly a significant pool of assets to invest in private capital as well as in fin techs. Additionally, there is more and more focus on start-ups in different sectors throughout Latin America; 2020 was a record year for investments in Latin start-ups.

The proximity to the U.S. and historical ties are also important to remember when analyzing Latin American economic and investment prospects. On the positive side, the U.S. could have a GDP level above pre-COVID levels in the near-term, which would help Latin American economies in terms of remittances and trade. A caveat for investors is that if long-term U.S. yields continue to rise, this will place emerging market assets under pressure. Nonetheless, profit growth for Latin American companies is likely to be much higher than for companies in other emerging markets.

Long-term U.S. Treasury yield

Original article: https://www.forbes.com/sites/mayrarodriguezvalladares/2021/04/09/look-for-hidden-investment-gems-in-the-gloom-and-doom-about-latin-america/?sh=7ce974494980

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