Mark Mobius, the emerging market specialist from Templeton Asset Management reckons that Brazil offers a great opportunity for investors with nerve. Telegraph UK asked him why.
What makes Latin America so attractive to investors?
The region's main attraction is its huge consumer market with pent-up demand for goods and services, as well as excellent companies that are at the same time under- leveraged and inexpensive. On top of all that, its natural resources are among the largest in the world.
How resilient can the region be in the context of a global slowdown and which markets are well-armed to resist a slowdown in the global economy?
During the boom in the past five years, Latin American countries have accumulated substantial reserves. Brazil, for example has over US$200 billion in foreign reserves and the government has no foreign net debt. Overall, our main markets, Brazil, Mexico,
Chile, Peru and Panama, have shown stable political environments, responsible fiscal discipline, commitment to a floating exchange rate and honour of contracts in place. All these support the region's strength in times of uncertainty.
In addition to natural resource and agriculture producers, what are the other key drivers of growth in Latin America?
Although the region is the world's largest (and lowest cost producer) of many commodities, the development of the local domestic consumer markets is another important driver. Take Brazil for example, with 190 million people and Mexico with 100 million. Bank loan penetration is still very low in both countries (38% in Brazil and 18% in Mexico) even in comparison to some emerging markets. Thus, this not only reduces the risk of bad debt, it is also a barometer of how under penetrated the countries are in terms of goods and services. Companies have thus been following conservative lending and leveraging policies.
How have the Latin American markets been affected by the correction in commodities' prices?
While commodity stocks have been negatively affected by the recent decline in commodity prices, many companies are still profitable at current price levels. While commodity prices have come down from their peaks, we do not foresee prices to return to extremely low levels in the near future. This is, in part, because of continued demand from emerging markets, even though growth has slowed, and relatively inelastic supply. Thus, we believe that commodity companies should remain profitable and constitute attractive investment opportunities.
In which Latin American countries/regions/sectors do you expect a faster/larger rebound and why?
We like Brazil, Mexico, Chile, Peru and Panama because they have been pursuing a disciplined approach to control inflation. For the other regional markets, we see few opportunities as capital controls are in place or they lack value stocks. We expect the larger countries, Brazil and Mexico to see faster recoveries once the global environment begins to improve.
The Brazilian economy is heavily involved in the farming, mining and industry sectors – what is the future for the Brazilian economy? What are the strengths and weaknesses of the Brazilian economy?
The Brazilian economy, although strong in the mentioned areas, is also quite diversified.Its big consumer market allows for many opportunities such as selling financial services, health care, cosmetics, beverages and others. For example, Skol is the world's third largest beer brand (after Bud and Bud Light) and is sold only in Brazil (in spite of beer consumption still being low in comparison to developed countries).
What is your outlook on Brazil and Brazilian companies?
Brazil has a growing consumer base with personal wealth to spend. This stands to benefit Brazilian companies, particularly in the consumer sector. Brazilian exporters also contribute to growth. We also favour undervalued companies with high dividend paying stocks, net generators of cash and low leveraged companies. At the same time, companies with a strong market position and competitive advantages are also attractive.
We continue to maintain a positive outlook on Brazil and its enterprises. We believe the irrational panic that forced many funds to withdraw from Brazil and the stress of the local currency due to the global liquidity concerns, have depressed valuations of the companies to create an enormous opportunity for investment.
Do you think now is the best time to invest in Latin American companies?
While no one can predict the absolute bottom of a market, valuations are looking attractive. History has shown us that the best time to buy is when everyone is despondently selling. Such situations enable us to pick up stocks at more appealing prices. We continue to look for opportunities in Latin America for attractively valued companies with strong fundamentals.
What are the downside risks of investing in Latin America now?
In Latin America, and emerging markets for that matter, a big risk is the abandonment of the market economy philosophy and a cessation of privatisation of state owned companies. Another potential risk is how central banks and governments handle inflationary pressures. Some countries have tried to mask inflation indices and others to freeze capital flows and not cut government spending. We, however, favour those countries that follow an orthodox monetary tightening when necessary, and at the same time have a responsible fiscal behaviour.
Emerging markets are also tied to the global markets, including the developed ones, since world trade has expanded dramatically in recent years and the advent of rapid and cheap communications means that news in one market can affect other markets. This all, however, does not mean a downturn on one market will be followed by downturns in other markets. Emerging markets may react in the short-term to something happening in the US, but local influences could take precedence and see markets change direction.
Source: Telegraph UK
