Britain is rebuilding its Latin American trading empire

William Hague thinks Britain should be selling much more stuff to Latin America, so he’s made the region one of his top foreign policy priorities. Since coming to power in 2010, the coalition has opened new embassies and consulates in Paraguay, Brazil, Haiti and El Salvador.

I’ve heard the Foreign Secretary explain the new policy many times since 2010. It’s essentially the same speech every time, but it’s quite a good one so I’ll forgive him for the repetition. And hopefully he’ll forgive me the following rough paraphrase.

“Britain used to be one of the biggest investors in Latin America. Helping to build its railways, dig its guano and develop its oilfields. The partnership brought prosperity to both sides of the Atlantic until Britain started to retreat from the region. The situation is so bad that Britain now exports more to Belgium than the whole of Latin America. Now this government will help British companies regain the initiative.”

I have not done it full justice there – there’s normally a few more jokes and historical anecdotes – but that’s the basic gist. And, to be fair, most of the businesspeople I speak to in the region confirm that the government is following through on its talk. The UKTI (UK trade and investment) offers more support to companies targeting the region, while ambassadors there now focus a lot more on trade instead of just diplomatic niceties. And in the latest part of the new strategy, Britain has joined the Pacific Alliance as an observer member.

We’re now part of the Pacific Alliance

Regular readers will know that I’ve long been a big fan of the Pacific Alliance trade group of Mexico, Chile, Colombia and Peru (here’s a quick refresher). Over the last few years I’ve talked about how these open, dynamic countries are the best bet for foreign investors in Latin America. Well it now seems that I’m not the only one to have noticed their potential. Panama and Costa Rica are also planning to join the Alliance.

But the most interesting development has been the reaction of countries outside Latin America. I went to the last Pacific Alliance summit in Colombia in May this year and reported how the leaders of Canada and Spain were busy pressing flesh and trying to drum up business for their home companies. Indeed, both those countries became observer members. And now the UK has joined them. Given that Britain isn’t on the Pacific and doesn’t speak Spanish, it might not seem like the most natural match. Yet officials at the Foreign and Commonwealth Office (FCO) have long been telling me off the record that they’re interested.

In practical terms, it’s hard to know what advantages being an observer will bring. In the future it could lead to becoming a member, and to a subsequent free trade deal. Although, for now that appears to be some way off. But in the short-term it will raise the profile of the Alliance in this country and highlight its trade potential to British companies. For example, today the FCO is hosting Britain’s first Pacific Alliance summit. Just like the Colombian version that I attended earlier in the year, it will give local firms and investors a chance to mingle with businesspeople and politicians from the Pacific Alliance countries and look for opportunities there.


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A flood of capital

The upshot of all of this, I think, is that we’re slowly going to see more and more investor interest in the Pacific Alliance countries, whether it’s British businesses setting up shop over there, or institutional investors putting their money to work in local capital markets. And it’s not just Britain that’s been made an observer: the Netherlands, Germany, Italy, France, Portugal, Turkey, Australia, New Zealand, China, America and South Korea have also jumped on the bandwagon.

This newfound interest in the Alliance will lead to an influx of capital that will come at just the right time for these economies. Peru, Colombia and Mexico have launched huge infrastructure programmes that will need serious investment to get off the ground.

But it’s not just about the money. Globalisation may get a bad rap in some places, but if handled properly, opening up your economy to leading international companies has a positive effect for local firms and consumers. For example, in Colombia the heads of multinational insurance companies told me that they were selling their policies at huge discounts because of the massive competition between international and local players in the sector. That’s great for Colombians buying their first insurance policy. Meanwhile, I spoke to plenty of local businessmen who admitted that working with European or American firms had forced them to make some of their business processes more transparent and accountable.

Build your own portfolio

In short, the expansion of the Pacific Alliance is another reason why I think investors should gain exposure to its member countries. So what’s the best way to do it? As I’ve mentioned before, there are no funds that specifically target the Alliance, and most retail funds have a heavy focus on Brazil. That may change in time, but until it does, one option is to build your own portfolio. Most of the region’s firms are out of reach because they are either not listed or only available on local exchanges. Fortunately, there is a good mix of strong local firms that trade in the US or UK.

From Mexico, I like Mexichem (OTC: MXCHF), an industrial conglomerate that makes the plastics that are used by most of the country’s manufacturers. I also like Banorte (OTC: GBOOY), the country’s only Mexican-owned bank, which is well run and involved in all the sectors of the economy.

So far in The New World I have steered clear of miners, not tipping a single one in almost two years. However, if you wanted to build a truly diversified portfolio you could pick up Mexican silver miner Fresnillo (FRES) and Chilean copper producer Antofagasta (ANTO) – both of which are listed in London.

Moving down south, US-listed Bancolombia (NYSE:CIB) https://www.google.co.uk/finance?q=NYSE%3ACIB gives you access to Colombia and Central America’s banking sector, while Peru’s BCP is also a well-run bank with regional aspirations. I also like steelmaker Ternium (NYSE:TX). It may be an Argentinian company but has a lot of exposure to the Pacific Alliance countries.

A more risky infrastructure play is Peru’s Cemento Pacasmayo (NYSE:CPAC) – a small player with a nice position in the less-developed north of the country. When it comes to tapping the region’s growing consumer market our options are more limited. One interesting firm is Chilean supermarket chain Cencosud (NYSE:CNCO), which is the third-largest in Latin America and has a big Pacific Alliance footprint. I also like airlines and airports as a way to play Latin American’s growing spending power. I would therefore definitely add Panamanian carrier COPA (NYSE:CPA).

Finally, you could add some oil firms, with Canada-listed Colombian operator Pacific Rubiales (TSX:PRE) being one of my favourites. However, we may see more interesting opportunities in this sector when Mexico enacts its energy reforms in 2014.

That’s it from me. I’m off to Ecuador and Mexico for the next few months, and will be sure to keep you updated with any investment opportunities I come across out there.

This article is taken from The New World, MoneyWeek's FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.


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