BEYOND BRAZIL: Trade winds blow

AndesBrazil dominates equity funds, but Nick Fitzpatrick looks at some of the other countries that attract fund manager interest. The economic trade winds of the world blow an arc through Latin America. Down south, Brazil is trading heavily with China, which usurped the United States as Brazil’s main trading partner in 2009. But to the far north, Mexico still does most of its trade with the US, which lies just over its border. In between, there is a patchwork of cross-border trade between smaller Latin countries. They have diversified their industries over recent years and companies look to pan-regional trade for expansion. These companies are funded by sizeable domestic pension funds such as Chile’s system set up under General Augusto Pinochet and which has influenced many other nations in their pensions design. The difference in the state of the economies of China and the US is inevitably going to exert an influence on investors’ views of Mexico and Brazil, the continent’s two largest economies. Being the second-largest economy, it is not unusual to see Mexico forming the second-largest holding in a typical Latin American equity portfolio, behind Brazil. For example, two Mexican companies featured in the top ten holdings of the BlackRock Latin American Trust at the end of July. The balance of eight companies was Brazilian. In August, the Aberdeen Latin American Equity Fund had a geographical exposure to Brazil ranked at 63% – its highest; Mexico was second with 24%. Nick Robinson, Aberdeen’s fund manager in Brazil, tells Funds Global: “Historically, Mexico was the biggest market in Latin America but Brazil has overtaken it in the past ten years. Being so closely linked to the US, Mexico has suffered since the financial crisis.” Roberto Lampl, head of emerging market equities at Baring Asset Management, said in a recent report: “We are neutral on Mexico and have very little exposure to companies trading with the US.” But he added that Mexico was showing signs of recovery and, considering the presidential election is due in July 2012, there could be higher levels of spending on social services and infrastructure during the run-up. Will Landers, portfolio manager of the BlackRock trust, made changes to the portfolio, which affected Mexico, in August in light of economic volatility. He said he remained positive for the region, but added: “We do have concerns over Mexico as it is heavily reliant on the United States, and we have reduced our Mexican portfolio accordingly.” A company BlackRock and Aberdeen continue to favour in Mexico is Femsa, the biggest independent Coca-Cola bottler in the world and the largest beverage company in Latin America. Femsa is a major shareholder in Heineken, having bought its beer operations in 2010. The deal was transacted in shares. Andean bloc
Brazil and Mexico are two of the five constituents of the MSCI Emerging Markets Latin America Index and are joined by Peru, Chile, and Colombia. GSP1 These three Andean countries are harder for fund managers to get into, but the convergence of their stock exchanges this year into one pan-regional exchange known as Mila, could increase investment in them. With its creation, Mila became the second largest stock market in Latin America after Brazil and ahead of Mexico. “It is possible if they align, some emerging market investors may look at the Andean countries as a bloc, whereas they may not look at the individual countries,” says Robinson. Individually, Colombia, Peru and Chile are quite illiquid, says Robinson. “If Mila can make this better, then great.” Companies are small, particularly in Chile and Colombia, and with large pools of domestic pension funds owning huge chunks of them, their shares are not often actively traded. Robinson invests in Chile. “It is perhaps the most stable of Latin American economies. During the Pinochet era, they put together a robust economy and the benefits are now being felt,” he says. “There is a high savings rate. It’s a small market and there are not many big companies. A lot of the larger ones look outside Chile to Peru, Colombia and Argentina for expansion.” GDP2Two Chilean sectors that could benefit from trade with China and India are copper and iron ore miners. This means that stocks such as Antofagasta could outperform, Lampl said recently. He added that his fund favoured a number of domestic names with pan-regional revenue streams, ahead of exporters with exposure to the developed markets. Given how he is sheltering the portfolio as much as possible from overseas developed-market companies, it is no wonder that Lampl says there is “very little chance” of contagion for Latin America from US and fringe Europe debt problems and the negative impact on global growth. Question marks
Fund managers in the region are still sensitive to political risks, even though democracy has now taken a firm hold. There was relief that Dilma Rousseff, Brazil’s first woman president who was elected this year, adopted market-friendly economic policies after her campaign suggested a swing to the Left.  Lampl said Peru is now more settled politically following the swearing in as president in July of Ollanta Humala, who announced a politically diverse cabinet and kept the central bank president in place. Although Landers said there were still some question marks about future policies in Peru, the fund brought the country from an underweight to a neutral using Credit Corp, Peru’s largest bank, as its main focus. ©2011 funds global

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