1. Resilient and improving macro environment
Latin America has shown its relative resiliency and benefitted from a conducive external backdrop, with rising commodities and flows into the region. The region is seen as ahead of the curve on rate adjustment process, though central banks there are keeping a close eye on the US Federal Reserve (Fed) and inflation data. On a positive note, domestic inflation in Brazil – the region’s largest economy – is coming down, which aids the prospects of interest rates gradually coming down in the region, despite a more hawkish Fed.
Over the long term, the region is well-positioned as a key global supplier of energy transition commodities – for example, the Andean countries are among the top global producers of copper and lithium, which are key metals for clean energy. Meanwhile, Brazil is a leader in wind while solar is also picking up. Broadly, the challenging macro in previous years fostered market consolidation and strengthened economic moats of the larger listed players, which provides support to a more robust earnings power going forward.
Chart: P/E forward vs 10-year average
Source: Bloomberg
2. Quality poised to outperform
Quality companies have largely been out of favor while the value and more deeply cyclical areas of the market have outperformed. With a backdrop of firmer commodity prices, it may seem sensible that these areas performed well. Moving forward, there could be further support for the economies across Latin America and as the region recovers, we expect for fundamentals to come back into focus. As such, we see quality companies as well-positioned to take advantage of a brighter outlook. Still, quality companies are expected to outperform even if the economic recovery proves more challenging than anticipated, due to self-help elements that we find within our long-term quality investible universe which, coupled with pricing power, should enable Quality to outperform in a tough market.
3. Record-low valuation and catalysts ahead
Regarding valuations, politics and fiscal concerns have dominated the region leading to elevated risk-premia across asset classes. As a result, there is potential scope for normalization once key events are behind. The region is at record low valuation levels and significant discount to EM suggests the risks are largely discounted and offers a favorable risk-reward proposition.
The political backdrop across the region has already made good progress over the year, providing better visibility as we approach the year-end and 2023. Fiscal discipline has been preserved in Colombia post-election, while constitutional discussions in Chile are now dominated by the center-right, which will tone down the new draft text. Even Peru has been managing to preserve the status quo under the political gridlock. In Brazil, the largest economy in the region, the first round of elections have now concluded, with a narrow margin between both contender. As both are well-known by the market, just moving past the election, which is set to conclude in October, could become a catalyst for positive market sentiment, regardless of the final outcome.
Chart: LatAm vs EM P/E forward 12m
Source: Bloomberg
Appendix: Investment Themes
Our holdings are well-positioned from a thematic perspective and well-aligned with the long term fundamentals of the region (select examples below):
Consumer aspiration: high quality consumer-focused businesses
- Raia Drogasil: Operator of pharmaceutical stores in Brazil with a growing digital presence
- Arezzo: one of the fund’s largest active positions, the once traditional shoe retailer leveraged on digital capabilities to evolve towards a house of brands which is now able to tap into new pockets of demand such as apparel.
Infrastructure: investment opportunity
- Rumo: Brazilian rail operator, exposed to growing export volumes, and linked to agricultural activity, which is less correlated to GDP.
Energy plays
- Raizen: Brazilian bioenergy company, involved in the production of sugarcane ethanol.
Best-in-class commodity names
- Grupo Mexico: owner of world-class copper mining assets, a metal which stands to benefit from increasing electrification.
Technological advancement
- Globant: Argentine digital strategy solutions company which operates globally.
Financial deepening
- Banorte: Leading Mexican bank which should benefit from a rising rate environment.
Important information
Risk factors you should consider prior to investing:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- The Company may charge expenses to capital which may erode the capital value of the investment.
- Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.
- With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as ‘sub-investment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds. In turn, this may have an adverse impact on funds that invest in such bonds.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
Other important information
An investment trust should be considered only as part of a balanced portfolio.
Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419.
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