"Tough times don't last, tough blokes do."
It sounds a bit cheesy I know, but I was touched by the quote. It's a text message that New Zealand cricket captain, Brendon McCullum, sent to his English counterpart Alastair Cook when the latter looked likely to lose his job.
England's leading test run scorer was under all sorts of pressure a few months ago. His side was on a losing streak, he was on miserable form and everyone was calling for his head. Fast-forward 12 months and Cook is back to his imperious best, recently setting the English record for the longest time at the crease in a defiant innings in challenging conditions against Pakistan.
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Cricket isn't popular in Latin America. In fact it's practically unheard of. Yet Cook's example of how over time quality will out, should be noted by investors in the region. If you want to test the quality of something you need to put it under duress and with Latin America being battered by external economic forces, we are starting to find out which economies are the most resilient.
For three years I've been telling investors to focus on the Pacific Alliance countries of Mexico, Colombia, Peru and Chile. They've rewarded my faith and are the strongest performing major economies in the region. Moreover, with investors running scared, now is a great time to invest in the Alistair Cooks' of the region.
An ambitious attempt to link stock markets
It started out as a trade pact in 2011 and has grown stronger every year. By cutting tariffs on 92% of goods traded between member countries it will boost business between them. That also makes it easier for regional supply chains to form, creating economies of scale and larger markets. Another exciting development has been the move to cut visa requirements, helping to boost intra-member business travel and tourism.
But the member countries aren't stopping there. The most exciting project is to integrate their capital markets. The Mercado Integrado LatinoAmericano (Mila) is an ambitious attempt to link the individual stock markets, which, with the exception of Mexico, are small and illiquid by UK standards. Over the years I've had several interviews with Juan Pablo Crdoba, head of the Colombian stock exchange and one of the architects of the Mila project. In fact he was recently in the UK, explaining Mila to institutional investors at the London Stock Exchange. As he readily admits, Mila is a long way from being finished. Trading volumes on the platform are still low, but Crdoba is convinced that the market will take off. "When we started there was a debate about if it could work or not. Now the conversation has moved onto how fast and how big."
The Pacific Alliance passes the Alistair Cook' test
I can see a measure of truth in all of those points but for investors like us it really doesn't matter. The fact is the Pacific Alliance has withstood the Alistair Cook test'. The region has been hit by falling commodity prices, tighter US monetary policy and an emerging market sell off. Some countries like Brazil and Venezuela have suffered painfully, with both facing their worst recessions for a generation. Meanwhile the Pacific Alliance countries have stood up to the challenge, with economic growth outstripping their larger regional rivals.
The main reason for the resilience of the Andean 3' Peru, Chile and Colombia is that they were in great macroeconomic shape going into the slowdown. That's allowed them to use counter-cyclical measures to keep growth going despite the fact that the prices of their main exports have plummeted. It also helps that they have floating exchange rates, which have absorbed a lot of the pressure and helped make locally-produced goods more competitive. As for Mexico, it's benefiting from the US recovery, being a major manufacturer for the world's biggest economy.
But the key point is that they are well-managed economies. It doesn't take much insight to see that many Latin American countries have lots of economic potential. But, given the region's poor economic track record in the two centuries since independence, investors would be right to worry if it would achieve this potential. As the old joke goes: "Brazil is the country of the future and always will be."
Well now the Pacific Alliance has passed the Alistair Cook test investors can be more optimistic about its members finally realising their potential. I've written in-depth analysis on the investment opportunities in Colombia, Peru , Chile and Mexico that offer a good starting point for following up on the Pacific Alliance members.
