A More Integrated Latin America

By Claus Born, Senior Executive Director, Templeton Emerging Markets Group

At the end of November 2010, Chile, Colombia and Peru are planning to integrate their stock exchanges, providing local investors with more investment opportunities and also allowing companies to access a broader investor base. We are likely to see increased foreign investor participation with improved liquidity. Once fully integrated, this new regional exchange should have the highest number of issuers in Latin America (before Mexico and Brazil), the region’s second-largest market capitalization (after Brazil) and its third-largest trading volume (after Brazil and Mexico).

Year to date, equity markets in Chile, Colombia and Peru returned 38.8%, 60.2% and 52.6% respectively^[1], outperforming the larger equity markets of Brazil and Mexico, which rose by 4.7% and 18.3% respectively.^[2]

Chile

Two major events brought the small Andean country worldwide media coverage this year. The most recent was the spectacular rescue of a group of miners trapped underground for more than two months. Chile’s newly elected President Sebastian Piñera was among the first to greet the miners when they came out of the ground. And earlier this year, a devastating earthquake with a magnitude of 8.8 struck the country, the seventh-strongest earthquake ever measured worldwide. While many were rescued from the rubble and the number of survivors was high, the total damage is estimated to reach about 15% of the country’s GDP.^[3]

Mr. Piñera’s government has targeted a 6% GDP growth annually during its term and wants to create 200,000 new jobs each year. It also wants to bring the country closer to its boom years of 1986 to 1997, when the economy grew at an average rate of 7.5% annually. So far, the country seems to be on track despite the impact of the earthquake, with GDP projected to grow 5% in 2010 and 6% in 2011.^[4]

We believe Chile will continue to be a leader in Latin America, in terms of managing the economy, encouraging investment, both local and foreign, and its stable policies.

Colombia

In August this year, Colombia elected a new president, Juan Manuel Santos, who will lead the government until 2014. He took over from the very popular Álvaro Uribe, who had led the country since 2002. Juan Manuel Santos is a former Minister of Defense under the Uribe government, which was very successful in limiting the threat imposed for decades by FARC guerilla forces in the country. Mr. Santos’ efforts have resulted in better security conditions, which have increased investment, and improved the world’s perception of Colombia.

The Colombian economy was relatively weak in 2009, but recovery is underway with a projected GDP growth of 4.7% in 2010 and 4.6% in 2011.^[5] A lot of investment is taking place in the energy and mining sectors, driven by a large resource base combined with favorable regulation. The expectation that Mr. Santos will continue the market-friendly policies of his predecessor reinforces the positive trend and contributes to steady growth rates.

Peru

Peru will be holding presidential elections in April 2011. The last presidential elections were overshadowed by the threat of an extreme leftist candidate taking over. This time, following very strong economic growth during the last few years, the polls indicate that the majority of Peruvians now favor a moderate candidate. Politics in Peru is as dynamic as its counterparts in the region, but the economy has been stable during the last 10 years, thus creating the foundation for sustainable growth.

There have also been strong investment opportunities in the mining sector. Peru is the world’s top producer of silver, second in zinc, third in copper and tin, fourth in lead and sixth in gold.^[6] In addition, the country has managed to develop alternative export products, especially in the agricultural sector. There also appears to be strong growth potential in retail and financial services. The country’s GDP is projected to grow 8.3% in 2010, one of the highest rates in the region.[7] It is very possible that Peru will continue to outperform most of its neighbors in terms of economic growth over the next few years.

Mark: Our Strategy in Latin America

Within Latin America, we are currently focusing on Brazil, Mexico, Peru and Chile. Our focus on the consumer and commodities sectors gives us exposure to some of the fastest growing companies in the region.  Robust consumer demand, supported by increasing per capita income, creates opportunities in areas as such automobiles, retail, and services such as finance, banking and telecommunications.  In the commodity area, resource-rich countries in Latin America are benefiting from increasing global demand.

Our bottom-up, long-term approach is based on analyzing  a wide range of companies’ fundamentals  such as earnings quality and growth, asset values, and cash flow potential over a five-year horizon.

The Latin American region is undergoing tremendous changes both politically and economically, as highlighted in our past 3 features. We will continue to share our insights and observations as we watch the region navigate through the various challenges.