Leadership Changes in Latin America (Mobius)

by Dr. Mark Mobius, Vice-Chairman, Franklin Templeton Investments

While Latin America has come a long way in the last decades consolidating its political democratic system and achieving economic stability, there is a strong need for infrastructure and other investments to sustain a healthy level of growth. The region has developed a unique profile to attract a highly-diversified investor base. We are seeing a large and young population moving up rapidly to the new “consumer” middle class, but at the same time having one of the lowest loan penetrations in the world. The rise of this consumer middle class and growth in per capital GDP is resulting in an increase in domestic spending, which drives the domestic economy. Secondly, the region has vast resources available at low cost.

Opportunities from this new consumer middle class has led to an increase in demand for products and goods in general and all types of infrastructure investments. As global demand for commodities continues to trend up, its large natural resource base helps to support the region’s fundamental long-term growth. One key concern we have is the lack of increased productivity over a long-term period.

Brazil and Argentina have been leading Latin American growth, and the region has been one of the top performing emerging markets in the third quarter of this year.[1] There have been some major changes on the Latin America geopolitical scene over the past few weeks. Argentina mourns the passing of former president Nestor Kirchner, who was expected to run in the 2011 election, while Brazil celebrates the victory of its first female president, Dilma Rousseff. In other parts of the region, we have Chile, Colombia and Peru planning to integrate their stock exchanges at the end of November this year, providing local investors with more investment opportunities.

Given these major developments, I have asked some of our key analysts in these markets to share their perspectives over the next few weeks.

Brazil

Gustavo Stenzel, Managing Director, Brazil, Templeton Emerging Markets Group

Dilma Rousseff had the strong support of current President Lula da Silva, whose popularity and status as Brazil’s favorite President to date gathered many votes for her. Ms. Rousseff’s win is an assurance to the people that Lula’s direction and policies will be continued, as indicated in her election speech where she re-affirmed the commitment to control inflation.

The Brazilian Real (BRL) has appreciated more than 6% against the USD since June this year.[2] As part of our investment process, we look for companies that have strong competitive advantages. The impact of foreign exchange rates on that competitiveness is also an integral part of that process. On the export side, we favor those that are low-cost producers globally. On the domestic side, it is important to assess the competitiveness of the businesses facing a continuing growth of imports into the country.

In the short-term, it is critical to look at government spending in terms of size, quality, effect on inflation and ramifications for high interest rates and taxes. Over the long-term, we believe Brazil should be focused on increasing productivity, especially in light of such strong currency. There should be structural reforms in areas such as education, tax, pension, the political system, privatizations and efforts to attract infrastructure investments. In addition, we will also need to see micro-economic reforms to help local businesses and improve the quality of life for its people.

In Brazil, we are very excited by domestic-driven stories that will benefit from the increase in purchasing power and the expansion of credit. We find banking and the food and beverage sectors particularly interesting, as new products and more value-added goods can be sold to the new middle class. The region benefits from growth in emerging markets, including urbanization and industrialization, given that it is a low cost producer of several commodities, such as iron ore and copper.

These are very exciting times indeed for Latin America and in the next few blogs, Mark and my colleague will be sharing their insights on other key markets in the region.