Search This Blog

Sunday, June 10, 2012

Use the global sell off to load up on Latin America

Fitch Ratings recently reported on growth sustainability in Latin America in the face of deepening problems in the euro zone.


Chile and Peru came out on top as best prepared in Latin America, with Argentina and Venezuela the least likely to withstand the slowdown.

The analysis seems to revolve around fiscal stability and the prevalence of a sizeable sovereign wealth fund.

Peru's wealth fund stands at about 3.5% of GDP while Chile's is estimated at almost 6% of GDP.

Mexico may prove to be the standout in Latin America over the next year as the country benefits from strong domestic demand and a recovery in the United States.

Recent polls for the July 1st presidential election have increased risk as the leftist candidate gains on the centrist PRI candidate Enrique Peña Nieto.

The news further weakened the peso and sent the iShares MSCI Mexico Investable ETF ( EWW , quote ) down 3% last week, compared to a loss of just over 1% for the iShares MSCI Emerging Markets ( EEM , quote ).

However the PRI is still expected to win the election and the economy should do well in the second half of the year.

Colombia may be a candidate to maintain its high growth rate as well. Consumer demand has remained strong and the recently implemented trade deals with Canada and the United States may help export strength. Colombia's fiscal position is not as strong as Chile or Peru, but direct investment remains high.

The Global X FTSE Andean 40 ETF ( AND , quote ) holds the forty largest and most liquid stocks in the Latin America markets of Chile, Colombia, and Peru. While each country is tracked through an exchange traded fund, the Andean fund provides the most diversified exposure across the region.

Argentina ( ARGT , quote ) and Venezuela are the obvious Latin America choices for weakness, not necessarily due to the eurozone debt crisis; rather deepening political risks and reliance on commodities.

Venezuela is particularly vulnerable given the country's need for oil revenues to fund fiscal programs.

The country will hold presidential elections in October with President Chavez favored to win, but battling cancer.

Recent articles have warned of increased policy risk in Brazil as well, as the government scrambles to institute a series of uncoordinated and populist stimulus programs.

Maria das Gracas Silva Foster, newly-appointed CEO to state-owned Petrobras ( PBR , quote ), recently assured congress that the company could stem a 40% decline in market capitalization over the last year.

Neither the eurozone crisis nor the economic slowdown in China may worry investors as much as the shift in policy risk in Brazil and Argentina.

Latin America is notorious for destroying investor wealth through expropriations and state-control of 'public' companies.

While fiscal stimulus and social programs are expected, the tendency is to a shift further to the left through a series of awkward populist programs.

Investors should be careful not to chase expected returns, accepting risk of total loss, instead favoring market-friendly stability in other Latin America options.

nasdaq.com

No comments:

Post a Comment