Before we get started this morning, just a reminder – if you haven’t yet read our emerging markets report (in association with Templeton Emerging Markets investment trust) then you can download it here.
On that topic – today we’ll be looking at an emerging market region which has been doing rather well this year. Given that stocks elsewhere in the world tend to be struggling a bit, that’s quite remarkable.
So why is Latin America outperforming – and can it continue?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Latin America has had a surprisingly good year so far
2022 has been a rough year for most markets. But one is already enjoying double-digit gains year-to-date.
As the FT points out, the MSCI Latin American index is up by more than 15% already this year (in US dollar terms). By contrast, the MSCI All-World index (which covers both developed and emerging markets) is down more than 10%.
Latin America is a big area and it covers a wide range of countries with a wide variety of economic and political approaches. If we were talking about anything other than investment, I’d say that we were doing the region a disservice by generalising.
However, we are in fact talking about investment, and when it comes to investing, it pays to keep things simple. And the simple reality is that Latin America is a commodity play.
It might not always be that way. One day, Brazil in particular may fulfil its sardonic promise of being the “country of the future” and as a result you’ll get a more nuanced approach to investing in the region, as with southeast Asia, for example.
But that’s not where we are today. So given that the majority of people reading this are only ever likely to put a small proportion of the assets that they allocate to equities into Latin America, it makes sense to focus on the key drivers.
Latin America has done well this year for two main reasons. Firstly, markets in the region stood out as being relatively cheap. Secondly, commodity prices were soaring even before the Russian invasion of Ukraine, and Latin America produces a lot of commodities.
Brazil dominates the regional MSCI index, which is made up of five markets. It accounts for about two-thirds of the value of the Latin American index. The other big player is Mexico, on about a quarter. You then have Chile, Peru and Colombia.
Performance has been pretty volatile, but overall, Latin America has underperformed both the MSCI EM index, plus the MSCI All-World index, over three years, five years, and ten years.
Does that mean it’s due a break now? Investing’s not that simple. But it is undeniably cheap relative to its peers – at the end of February it was trading on a forward price/earnings ratio of 9.3, compared to 11.6 for the wider index, and 16.5 for the all-world one.
How to invest in Latin America
One benefit for Latin America is that it’s not really exposed to Russia or Ukraine in any significant way. As Nikhil Sanghani points out for Capital Economics, “the main economic effect of the crisis for the region will come indirectly via the impact on commodity prices.”
On that front, rising prices are a bit of a double-edged sword. Grain producers should benefit from higher prices, but high oil prices in particular will push inflation higher. Given that Latin America does not have the best record on that front, it’s worth keeping an eye on that side of things.
Politics is, of course, an issue, as with any emerging market. One big problem with resource stocks is that the more profit they make, the more tempted governments become to increase their tax rates (this is by no means purely an emerging market phenomenon – look at calls for windfall taxes in the UK).
However, given the combination of relative cheapness as well as relative appeal (as an area which is a bit more shielded from today’s geopolitical risks than many others), I’d say that the potential positives outweigh the negatives.
There’s a technical point that should work in Latin America’s favour, too. Until the sanctions kicked in, Russia was included in emerging market indices. Now the “Brics” (Brazil, Russia, India, China) have been reduced to the “Bics”. That means, in effect, that the index-tracking money that was allocated to Russia needs to be split between the other three.
Probably the easiest way for UK investors to invest in Latin America is via the BlackRock Latin American investment trust (LSE: BRLA), which is one of several investment trust picks that Max looked at in MoneyWeek magazine at the start of this year.
The trust has about 60% of assets in Brazil, 26.5% in Mexico, with Chile coming in a distant third on 6%. Financial stocks, materials and consumer staples make up the top three sectors. Brazilian miner Vale and Brazilian oil giant Petrobras are the top holdings. It currently trades on a discount to net asset value of about 9% and the dividend yield is 5%.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
Autumn Statement: Households still face an extra £4,000 tax bill despite NI cuts
News Autumn Statement tax give-aways will be offset by fiscal drag, the Resolution Foundation warns
By Marc Shoffman Published
NatWest and RBS to shut doors on another 19 branches amid shift to digital banking
NatWest and RBS join hundreds of high-street banks closing their branches- see the full list of closures.
By Vaishali Varu Published
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
Best investing apps
We round up the best investing apps. Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go?
By Ruth Emery Last updated
The top funds to invest in - November 2023
Tips Investors are focused on income strategies and FTSE heavyweights. We look at what investors have been adding to their portfolios in the last month
By Vaishali Varu Last updated
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published