Obama’s Americas summit is good for our investments

The term ‘historic’ gets overused by journalists. But they might have been on to something over the weekend when writers from the BBC to The New York Times used the word to describe Barack Obama’s meeting with Raúl Castro. The first face-to-face meeting between the leaders of the two countries for more than half a century was the highlight of the Summit of the Americas. 

Let’s get one thing straight – Latin America has no shortages of regional organisations, talking shops and alliances. By my count, there are at least nine major ones. The Americas summit is part of the Organisation of American States, which is ultimately just one of those groups.

For the large part, in my cynical opinion, these organisations don’t do a great deal. For example, the recent Americas summit didn’t even produce one of those bland communiqués that you can normally expect at these types of multinational events.

But that doesn’t mean that the Americas summit isn’t important. It offers a window into the economic, social and geopolitical trends that are shaping Latin America. And that’s why it’s useful for investors in the region to analyse.

Cuba and US reconciliation is full steam ahead

Obama and Castro’s handshake and the one-hour ‘affable’ meeting tells us that the US and Cuba are progressing firmly down the path of friendship. The two countries shocked the world in December last year when they announced plans to ‘normalise relations’. At the time, some analysts doubted the extent of the deal, but so far it is progressing quickly.

At the summit, Obama hinted that Cuba would be removed from the list of countries sponsoring state terrorism; a move that would make it much easier for US firms to do business with the country. Already a US telecoms firm has signed a deal to provide long-term telephony to Cuba, while online accommodation platform Airbnb has started listing Cuban apartments for its US customers.

If Obama follows up on the summit promise, then more deals like that will happen and that will be good news for one of our favourite funds. I wrote about ways to play the story back in January and you can read about the fund here 

Rediscovering diplomacy

“…the days in which our agenda in this hemisphere presumed that the United States could meddle with impunity, those days are past.” To be honest, I’d say that “meddle with impunity” is putting it mildly. America supported a number of particularly horrible dictatorships from Guatemala to Chile and has untold amounts of Latin American blood on its hands.

But Obama’s admission that the US had erred in the past and, perhaps more importantly, the promise of a different policy in the future, bodes well for US-Latin American relations.

The fact is that the US has more or less ignored Latin America since the end of the Cold War. The first Gulf War began a process that saw America get steadily sucked into the Middle East.

But now the US is starting to give more attention to the region. The rapprochement with Cuba, for example, wasn’t just about improving relations with those two countries. It also removed one of the traditional obstacles to better relations with the rest of Latin America.

Likewise, when the US made the diplomatic blunder of declaring Venezuela a “threat to national security”, which went down like a lead balloon with other Latin American countries, it made amends by sending Secretary of State officials to Venezuela before the summit. There was even a short meeting between Obama and Venezuelan president Nicolás Maduro on the sidelines of the conference.

America’s decision to reengage with the region, and its realisation that it has to do so by building consensus, has good consequences for our investments in Latin America.

For example, prior to the summit, Obama visited the Caribbean where he unveiled a new initiative to fund renewable energy projects. The idea is to help Central American and Caribbean economies face up to an energy future without Venezuelan-subsidised oil. That ties in with one of our long-term investment themes here at the New World: Latin American renewable energy.

America is back

It wasn’t just US diplomats that started to ignore Latin America – its companies did too.

China’s rise, and its insatiable demand for commodities, helped it overtake the US as the main trading partner for many Latin American economies. During the last 13 years, Latin American exports to China grew by an average of 23% per annum over the decade hitting a record high of $130bn in 2013. The return trade has also rocketed with Chinese exports to Latin America and the Caribbean worth $140bn in 2013.

Those statistics tell a story, but the most dramatic symbol of China’s rise in Latin America is found in Nicaragua, where Chinese companies are planning a $40bn transoceanic canal to rival the American-built Panama Canal.

But while China may be the main challenger, Europe is also stepping up its presence in the region.

From the mid-’90s onwards, Spanish firms began a massive spending spree that saw them buy some of the biggest corporate names in Latin America.

Today, companies from Spain and Italy are heavily involved in Latin America’s infrastructure push, while British capital and expertise played a big role in the region’s recent natural commodity boom. And as a trading block the EU has also increased its presence with a host of free trade agreements with Latin American economies.

Japan and Russia deserve mention as they too are increasing their investments and trade with the region. But, with the benefit of a smarter US diplomatic effort, it seems that American companies will start to push back into Latin America.

I covered this story last year, when I explained why all this outside interest was good for our investments. The return of the US will give even more support to asset prices.

Opening up is good for both sides

The more friendly reception given to Obama at this conference – for example, members refused to back Venezuela’s proposal for a communiqué that condemned the US sanctions – may also reflect changing economic realities.

A lot of the move towards China was driven by high commodity prices, which have fallen off slightly. The subsequent drop in export revenue is now pushing Latin American countries to open up their economies, embrace reform and find other sources of finance.

In the last year, we have seen major reform programmes in Mexico and Colombia, while Brazil has adopted a more market-friendly finance minister and Ecuador returned to the international bond markets. All of which is designed to attract more Western investors to these economies.

One of our long-term favourite investment themes is the Pacific Alliance – an open, dynamic trade bloc made up of Chile, Peru, Colombia and Mexico. Now it seems that more countries in Latin America may be taking up their approach.

All in all there was plenty at the summit for long-term investors in Latin America.