The region has been much harder hit than the broader emerging markets sector over the past year, with the MSCI EM Latin America index down 27.48 per cent while the MSCI Emerging Markets index fell just 14.29 per cent.
Performance of indices over 1yr
Source: FE Analytics
As a result the Brazilian market, which makes up 60 per cent of the region, is trading on just 9.4 times earnings, falling to 8.5 times in 2015.
Investors looking to buy into a rebound story could be attracted by this apparent bargain and hope that this market could be able to rebound faster and further.
Dean Newman (pictured), manager of the £128m Invesco Perpetual Emerging Countries fund, says that he expects the region to get a boost later on this year as weaker currencies allow its economies to piggy-back on improving developed world demand.
“Its growth has been slowing and continues to slow,” he said.“However, in the major markets economic growth remains positive.”
“I believe that weaker currencies will provide a boost to competitiveness in the second half of 2014 and into the next year if this is also allied with an improving economic backdrop in the developed world.”
“I think that’s something that can help economies recover in Latin America.”
Newman says that the deviation of currencies from their five-year trend is at extreme levels, which makes it likely that there will be a reversion towards the mean in 2014.
“There has been a significant adjustment to a number of Latin American currencies and this will improve the competitive position of those economies.”
“Because emerging countries tend to have free floating currencies, this adjustment has acted as a pressure valve and as economic activity improves in the developed world, that will help the growth outlook for emerging markets.”
Newman took his position in Latin America down from 20 per cent at the start of 2013 to just 11.14 per cent today.
He says that he underestimated the effect tapering of QE would have on emerging markets, but that there is another dynamic happening.
The manager says he was too optimistic about improving growth in developed countries and jumped the gun with his higher weighting.
“I probably underestimated how long it would take for the developed economies to recover,” he said.
“After the credit crunch in 2008, at that point in time Latin America recovered extremely quickly and economic policy was pretty good.”
“But the growth in the developed world didn’t rebound and for three to four years that was the position in Latin America, but the developed world didn’t recover and that did start to have an impact on Latin America.”
The manager’s holdings in the region include Brazilian logistics company JSL, which Newman says has proved itself very resilient to a weakening economy in Brazil. He also holds Mexican REIT Fibra Uno.
Will Landers (pictured), manager of the £158m BlackRock Latin American investment trust, is also confident that the region will soon rebound.
“Over the past couple of years emerging markets have suffered as investors have been going back to their home markets. The heavy lifting is behind us and the big adjustment has been done.”Landers says that the region’s improving demographics will soon come back into play and over the long-term the drivers of economic growth remain intact.
Brazil looks particularly attractive thanks to its solid economic fundamentals and cheap valuations, in his view.
“We have shifted back to Brazil over the last couple of months because when you look at valuation multiples in Brazil, they are some of the cheapest out there.”
“Brazilian companies have done a good job of meeting expectations over the last year,” he added.
“In the short-term, Mexico has more earnings risk given the economy is not recovering as much as expected.”
Political inertia has been the reason, Newman explains.
“Last year in Mexico the government basically stopped spending money,” he said.
“At the start of the year they expected 4 per cent economic growth but they ended up with 1.5 per cent.”
The government has embarked on a slew of reforms that should eventually bear fruit, not least in the energy industry, which is being opened up to private interests.
However, Landers warns that the process of selling off licences is still quite some time away, and the country is unlikely to see the economic benefit for a couple of years.
Landers’ portfolio has lost less than the index over the last year in share price terms, although this still amounts to a loss of 25.69 per cent. NAV was down 28.3 per cent.
Performance of trust vs sector and index over 1yr
Source: FE Analytics
The manager says that he has the ability to hedge currency exposure but prefers to deal with the issue through stock and sector selection, buying more exporters if he thinks the currency is going to weaken.
FE Trustnet recently looked at the emerging markets funds that have protected best against the downturn.
Apart from not being invested in Latin America, one of the most notable features of these funds was their overweight to technology stocks.
These have managed to deliver far more growth than the materials and energy stocks that feature high up on many emerging market indices.
Fidelity Emerging Markets has 22.1 per cent in technology, media and telecoms and Standard Life Global Emerging Markets 23.4 per cent.
Landers admits that this is an area in which the Latin American index is light, with one stock in Brazil and one in Chile.
The consumer discretionary sector is his second-biggest overweight despite being only the fourth-largest sector in absolute terms.
However, he says that the emergence of the middle class in Brazil and Mexico in particular is a story that has plenty of room left to run and should lead to good returns for investors over the medium-term.
