Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Xavier Hovasse, fund manager, Carmignac Emerging Discovery Fund.
This year has proved that, when it comes to emerging markets, politics matters. The sluggish growth seen in developed markets over the past few years has underlined the need for every emerging market to push through structural reforms, where needed, to lay the foundations for long-term growth. We favour markets where we can see such reforms taking place, alongside promising economic indicators such as a current-account surplus, strong growth prospects, and sensible monetary policies.
Mexico and Colombia look like the ‘best in class’ markets. Brazil and Argentina still face challenges. Mexico is the Latin American nation with the largest weighting in our emerging-markets fund. It is one of the leading reformers in the region, and as such is becoming more and more appealing than its neighbours for long-term investors. Improvements to its labour and energy markets, as well as fiscal reforms, will increase its potential growth rate. The energy reforms in particular should attract considerable foreign direct investment.
But it’s not just about politics: Mexico doesn’t rely as much on commodities exports as its emerging peers. Manufacturing accounts for 25% of its GDP, which should help its current-account balance. Also, given its historically strong correlation with US growth, any sign of improvement in America will benefit Mexico’s exporters, such as the automobile sector. This improving backdrop will also create investment opportunities in the finance, consumer and property sectors. Investors should look for businesses that generate lots of cash, and have strong balance sheets along with solid growth. We await further developments in the opening up of Mexico’s oil sector during the second half of 2014. Meanwhile, we like the fact that it is an under-geared economy with an improving political outlook.
Colombia’s leaders are also driving through reform. Latin America’s fourth-largest economy has been helped over the past year by improved stability, thanks to peace talks with the guerilla group Farc. The economy has been boosted by higher public spending and growth in private consumption. The re-election of Juan Manuel Santos, and his ongoing determination to push through structural reforms, is good news for Colombia and its prospects. Santos’s victory should see his $54bn infrastructure investment plan (14% of current GDP) continue over the next five years. This aims to address the collapse in infrastructure investments witnessed since 2008, and to improve the overall quality of transport infrastructure. This should boost economic development over the long run, and will be carried out through public-private partnerships – good news for the domestic cement market (ie, Cementex Latam and Cementos Argos).
The above nations have taken the right steps to boost growth. Brazil and Argentina first need to face up to challenging milestones. The upcoming Brazilian election is vitally important. It seemed a foregone conclusion only months ago – but recent polls show that President Dilma Rousseff’s re-election is far from assured. We believe Brazilian assets would react positively to a change in leadership. A lack of infrastructure investment is weighing on growth prospects and encouraging inflation. A sustained effort to deal with this will be welcomed as being good for long-term growth.
As for Argentina, if it successfully gets through its end of July deadline for debt repayment, then the fact that it has much sounder economic fundamentals than most people realise (impressively high doctorates per head ratio, low private and public indebtedness, massive shale gas reserves, for example) suggests a more positive economic trajectory over time.