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Will this surging market carry on its rally for the rest of 2016?

30 April 2016

Latin America focused funds have surged of late but are still far from their previous highs since selling off several years ago.

By Daniel Lanyon,

Senior reporter, FE Trustnet

With the exception of gold funds, the best performing funds of 2016 so far have been Latin American and Brazil focused equity portfolios.

For several years Latin America has been one of the most out of favour areas of the market. The Latin American region, which is a subset of the emerging markets space, has been broadly losing money for five years with most of the funds investing here still down by at least 30 per cent.

Performance of funds and index over 5yrs

  

Source: FE Analytics

However, over the last three months the market has come roaring back with the index up 35.8 per cent while funds such as Allianz Brazil and HSBC GIF Brazil Equity have made more than 50 per cent.

Performance of funds and index over 3 months

 

Source: FE Analytics

Emerging markets have been generally performing better than developed markets over this period due to a weakening US dollar and improving sentiment to China, but Latin America and more specifically Brazil (which makes up the bulk of the broader Latin American index) has soared more sharply.  

This is partly due to some recovery in commodity prices but also because Brazilian president Dilma Rousseff has become increasingly embroiled in scandal that many have said will soon result in her impeachment, a move investors highly favour.

Thomas Smith, manager of the Neptune Latin America fund, says this is part of wider political trend set to boost markets.

“We believe Latin America is shifting away from the left of the political spectrum and towards the centre. Mexico, where the election of Enrique Pena Nieto in 2012, and Argentina, which saw Mauricio Macri come into power in 2015, have already moved.”


“Last year saw the replacement of Argentina’s president Cristina Kirchner, who is currently embroiled in a court case for fraud, with centre-right candidate Mauricio Macri. Peru is next on the list with the election of either Keiko Fujimori or Pedro Kuczynski, the two remaining candidates left in the race after hard-left figure Veronika Mendoza failed to make it to the second round run-off.”

“Chile has not bucked this trend either, with president Michelle Bachelet being drawn more towards the centre as her popularity has fallen. The latest example of course comes in Brazil, with the Lower House voting in favour of proceeding with the impeachment of president Dilma Rousseff.”

William Landers, manager of the BlackRock Latin American Investment Trust, agrees there is a wider trend of politics in the region moving away from more left wing governments to those seen as more pro-business.

“Latin America did move to the left over the past decade and many companies became quite uninvestable such as Argentina and Venezuela. But when you look at what is happening in Argentina and what is happening in Brazil and what happened in Mexico then it is clearly giving a boost to confidence and with that comes investments,” he said.

Both candidates in Peru’s upcoming election are also seen as business and market friendly, he added.

Oliver Leyland, senior investment analyst on the strongly performing Hermes Global Emerging Markets fund, says Brazil in particular is still beset with problems despite the recent rally.

“The economic reality is dire, with Brazil experiencing the worst recession in many decades. Unemployment is soaring, disposable incomes are being squeezed and business is holding off on any meaningful investment. The business community and investors are increasingly hopeful a change of government can usher in a period of necessary reform – with fiscal and social security reform the most pressing issues for the country,” he said.

“However, there is also an acknowledgement the path to reform will be uncertain and painful – with deep spending cuts required. Should we witness a critical stabilisation of the political backdrop and economy, confidence levels could rebound swiftly. “

“For the longer-term structural bull case to be come to fruition, the renewed confidence must be followed up with reform and a recovery in corporate profitability from the current single-digit return on equity levels. While the path is likely to be volatile, a number of the key buildings blocks may now finally be falling into place.”

Brazil makes up almost half of the MSCI Latin American index and is 6.6 per cent of the broader MSCI Emerging Markets index.

Tilney BestInvest’s Jason Hollands thinks while the political events in Brazil have clearly been positive for the market, he says caution is still wise.

“While the prospect of an end to Rousseff's disastrous stewardship of the Brazilian economy and public finances, and the election of pro-business governments across Latin America is positive from an investment perspective, investors should nevertheless tread carefully and resist the temptation to throw caution to the wind and rush to invest in a specialist Latin American fund on the back of recent market euphoria,” he said.

“The prospects for Brazil may well be turning a corner but the country faces many headwinds after years of economic mismanagement and a ballooning budget deficit.”

Instead Hollands says investors would be better placed to get exposure through an emerging market fund or investment trust.


Hollands is fan of the JP Morgan Emerging Markets investment trust for exposure as it has an overweight position in Brazil and is currently trading at a 12.6 per cent discount to net asset value (NAV).

Manager Austin Forey, who has headed the trust since 1994, has 11.4 per cent in in Brazil and 5.7 per cent in Mexico, a clear overweight.

The trust has beaten its sector average and the broader index over the past five years.

Performance of trust, sector and index over 5yrs

 

Source: FE Analytics

It has an ongoing charges figure of 1.16 per cent and has 4 per cent gearing. 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.