Latin America has done surprisingly well since I last looked at BlackRock Latin American (BRLA) and Aberdeen Latin American Income (ALAI) two-and-a-half years ago. Its markets were very much out of favour as sabre rattling by Maduro in Venezuela, falling commodities prices, corruption scandals in Brazil and a likely extension to Peronist policies in Argentina under presidential candidate, Daniel Scioli, contributed to a slump in the region’s fortunes.
I concluded by saying that BRLA was a contrarian bet but, when things did take a turn for the better, you could do very well.
Since September 2015, BRLA and ALAI have both returned 71.5%. The best-performing markets in the region have been Peru and Brazil, up 134% and 118% respectively. The other market that did very well was Argentina which rose by 58% in sterling terms last year, I think making it the best performing market in the world. The laggard has been Mexico, a key component of the MSCI Latin America index (23% of the index against 60% for Brazil), which returned 10%.
The main drivers have been political but commodity price swings have also had an influence. The Peruvian stock market had a great 2016 after Pedro Pablo Kuczynski, a pro-business candidate, narrowly beat Keiko Fujimori in that year’s presidential election.
Furthermore, Peru is a major copper producer and copper prices also staged a recovery in 2016. The election of Donald Trump, with his mooted $1 trillion infrastructure investment plan, gave fresh hope to a market that had been in the doldrums since 2011. In the event, the copper price has slipped a little this year but remains about 50% higher than its 2016 lows, despite Trump’s failure to tackle the woeful underinvestment in infrastructure in the US.
For his part, Kuczynski was hamstrung in his efforts to reform the economy as Fujimori’s party dominates Peru’s House of Congress. He was also criticised for freeing Fujimori’s father, Alberto (imprisoned since 2007, convicted in 2009 of involvement in human rights crimes and sentenced to 25 years). Finally, in March 2018 he was forced to resign after being embroiled in the Oderbrecht corruption scandal.
Oderbrecht is Latin America’s largest construction company. Marcelo Oderbrecht, its chief, went to prison in March 2016 after being convicted of bribing politicians and officials across the region. In Brazil, this contributed to President Dilma Rousseff’s impeachment and replacement by Michael Temer. This was welcomed warmly by that country’s stock market which, once again, saw Temer as a more pro-business president. He took office in August 2016, but his period of office has been beset with corruption allegations against him, accompanied by wild swings in markets.
There are positive signs, inflation is under control, interest rates are falling and Brazil is emerging from recession, but fresh elections are scheduled for October this year and left wing and populist parties are leading the polls.
In Argentina, Mauricio Macri, the former mayor of Buenos Aires, was elected president in 2015 in a surprise defeat of the Peronist candidate. His economic reforms have rehabilitated Argentina in the eyes of foreign investors. Inflation is falling, Argentina has settled its defaulted debt and credit growth is surging.
Argentina is also rumoured to be a candidate for promotion to the MSCI Emerging Markets Index. However, challenges remain. There is resistance to Macri’s efforts to liberalise the economy and drought is hitting Argentina’s production of food for export.
Mexico will hold elections this year on 1 July. The current front runner is Andres Obrador, leader of the left-wing “Together we’ll make history” coalition. Part of his message is strong resistance to the anti-Mexican rhetoric from the Trump administration. Nafta renegotiations are rumbling on and any final decision may be postponed until after the outcome of the election. The general view seems to be that an Obrador win would mean more bad news for Mexican stocks and its currency.
For the fund managers trying to negotiate a path through the Latin American maze, politics are an unwelcome distraction from the day job of picking good companies. They have both done a reasonable job of this but, if I have a criticism of the two funds, it is that their returns have hugged their benchmarks over the long term (BRLA is benchmarked against MSCI EM Latin America while ALAI is benchmarked against a combination of the MSCI EM Latin America 10/40 index and a Latin American version of the JPMorgan GBI-EM Global Diversified bond index).
In some ways, that is a remarkable achievement given the gyrations in the underlying markets but the BRLA board has recognised the problem and has asked the manager to take more risk relative to the benchmark.
The situation in Venezuela may not have changed but many other factors worked in Latin America’s favour over the past few years. Now the horizon seems clouded and the sector may face new political headwinds. These may throw up new buying opportunities.