By Viktor Szabó, Investment Director, Aberdeen Latin American Income Fund Limited
– It has been a time of political upheaval across Latin America with Brazil, Mexico and Colombia seeing elections
– With this political upheaval resolved, investors can refocus on the region’s economic growth
– There are exciting opportunities across the region as new sectors emerge and governance improves
It has been a time of political upheaval across Latin America. Brazil, Mexico and Colombia have seen elections, while Mexico has also had to contend with the renegotiation of North American Free Trade Agreement (NAFTA). In the short-term, this upheaval has been matched by stock market volatility, but we may be entering a new phase for the continent, which could see better times ahead for investors.
There has already been some progress. The Brazilian market has rallied considerably on the news that Jair Bolsonaro will be president. The biggest fear was that the left-leaning PT party would make a come-back, but voters chose financial discipline, even if they have had to hold their nose on a number of his social views. On the economy, Bolsonaro is likely to be safe pair of hands. He is a trained economist, a former finance minister and should to bring more orthodoxy to Brazil’s economic programme.
In Mexico, AMLO (Andrés Manuel López Obrador) was not the market-friendly option and investors were initially fearful of the accession of a left-wing president. The problem was compounded by uncertainty over the NAFTA renegotiation with the US, one of Donald Trump’s flagship measures. However, ultimately, the reality has not been as bad as feared. The NAFTA deal has been agreed, with relatively few changes to the original. AMLO’s pre-election rhetoric has not carried through into his policy agenda. His party has also made progress in the legislature, which has given him a better mandate to govern. Mexican assets had been weak ahead of the election but have also rallied more recently.
Elsewhere too, political uncertainty has been resolved favourably. In Columbia, for example, the new government has implemented tax reform, maintained fiscal rules and increased personal income tax. It has also introduced a more progressive VAT base. It ends a long period of political uncertainty that had impacted investment in the country.
The problem with any political uncertainty is that companies and international investors defer investment. To our mind, the resolution of this uncertainty – without the turmoil that has often accompanied previous transitions – allows investors to refocus on economic activity and the strength of companies in the region. Here, we believe, there is much to be positive about, both at a macroeconomic level, and among the corporate sector.
The region’s economies are being given a boost from high oil prices. The past 12 months have seen the oil price rise 20%, peaking at around $85, largely as a result of US policy against Iran and Venezuela. Columbia is likely to be the biggest beneficiary of this trend. However, while this is undoubtedly a tailwind, it is a mistake to see Latin America purely as a commodities story. Latin American economies have orientated away from commodities and towards manufacturing, services and tourism and it is here that the greatest opportunities lie.
The Aberdeen Latin American Income Fund Limited is overweight in consumer and industrial companies, plus selected real estate companies. We believe these areas are likely to be the key beneficiaries of Latin America’s growing populations with increasing disposable income, while avoiding regulatory and political risk. Against the index*, we are overweight in Brazil, which has a deep market and quality companies. Some Latin American companies still have governance issues, so we are careful where we invest and will work with companies to improve their record.
Our fixed income holdings generate the income on the trust. At the moment we have a higher weighting in equities because we believe there is greater growth potential at the point in the economic cycle. In 2016/17, when the cycle started to turn, the central banks cut rates and it was positive for the bond market. However, as earnings have recovered, growth and investment have come back, companies have cut costs and margins have recovered. This should be better news for equities.
A final note on Argentina. The country has been an economic trouble spot for many years, but more recently had seen signs of improvement. However, it became clear earlier this year that the fiscal adjustment wasn’t happening fast enough, which left it vulnerable to a higher dollar and higher US interest rates. It was unfortunate that the country had a drought this year, which had an impact on exports.
Nevertheless, the Government has been proactive in its negotiations with the International Monetary Fund (IMF) and is moving towards a balanced budget next year. The price is recession, which is difficult for Argentine citizens and for President Macri, who faces re-election next year. We don’t see huge contagion across Latin America. Argentina’s problems are idiosyncratic and should not spread to other parts of the region.
With this in mind, we are optimistic on 2019. Argentina aside, the political risk has abated and transitions achieved without significant disruption. Economies across the region look in better health and companies are operating against a relatively benign backdrop. The region is rich with opportunities.
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Find out more at: www.latamincome.co.uk
GB-071118-76472-1
*The performance of the equity sleeve of the fund is measured against the MSCI Emerging Markets
Latin American 10/40 index, while the fixed income sleeve against JPM GBI-EM Global Diversified
Latin America index
