EDITED TRANSCRIPT
Is it worth investing in Latin American companies?
Amit Goel: So, when it comes to Latin America, I think it's been a more volatile asset class if you think about the long-term growth of two of the largest economies in Latin America, Brazil and Mexico. The long-term trend growth is not that great. We're talking about 2% plus minus, which is much lower than what you've seen in some of the economies in Asia. But also the volatility of that growth is very high.
Every five to six years you see a recessionary period in Brazil – Mexico is very much tied to the US, so US cyclicality impacts Mexico as well. So, I think you're talking about economies that are lower trend growth as well as more cyclical, and that is not a good backdrop for long-term investing. So you have to be very sure of the cyclicality. You have to pay lower multiples because growth is lower. But that doesn't mean that there are not good companies in these countries to invest in.
I think for us, as bottom-up investors, there are still a good bunch of companies to choose from to benefit from some of the structural changes that we see in these countries. For example, when it comes to Brazil, there is a lot of digitisation happening in the financial space.
The digital financial inclusion of the Brazilian population can throw up opportunities. There are very good companies that are consolidating markets in a lower growth market, benefiting from better capital management as well as their purchasing power versus their clients. So, I think there are very specific themes in countries like Brazil, which you can buy and have a medium to long-term view.
When it comes to Mexico, they're benefiting from the diversification of global supply chains. The US is trying to import less from China and in turn importing more from countries like Mexico, India, and ASEAN. Mexico, being very close to the US, benefits more from that. So I think there are some structural things in place, and some cyclical things in place, and if you combine both of them, I think, you still get a good opportunity set to buy companies in Latin America.
What other trends are you seeing in these regions right now that you think investors should be taking a closer look at?
Amit Goel: I think a positive development in Brazil is that the country is improving its fiscal and external balance sheet. They have become a net exporter of oil. Commodities in general have been stronger in the last three or four years, which is a positive development for Brazil because it's a net commodity exporter - whether you're talking about hard commodities like iron ore or soft commodities like food.
They have become more export competitive. They were net importer of oil. They have found oil, they're exploring more oil, so they've become a net exporter of oil. So they have improved their external situation, which is a tailwind for the economy to grow faster over the medium term. At the same time, digitization is happening, which improves productivity in the market. And what has happened in Brazil is that it is the biggest real rate economy in the world now.
Rates are 13%, and inflation is 4-5%. So Brazil has about an 8% real rate, which is very high for any country. So whenever you see the Fed cutting rates, which probably happens in the second half of the year, Brazil has a lot of monetary room to ease, which can drive the markets.
So I think this rate cycle in Brazil is throwing up very good opportunities for us in stocks that are rate sensitive and which are more aligned to the real rate decline in Brazil.
When it comes to Mexico, I think there is a positive tailwind from the fact that the US wants to import less from China and more from regions like Mexico, India, and ASEAN. So in this global diversification of the supply chain, Mexico has a positive impact.
And there are investments happening on the ground, manufacturing capacities and infrastructure that have been created, which is helping companies in sectors like cement and steel etc.
We are very much more focused on the long-term beneficiaries of this growth. So I think we like the banking sector in Mexico. We like some large Mexican conglomerate companies with logistics businesses and mining businesses. We like airports in Mexico because they will generally benefit from the higher GDP growth, but air travel penetration will also improve.
These Mexican airports are also a very strong channel for travel to and from the US. So they will benefit from that commercial travel improvement. So I think while we understand the short-term tailspin from imports into the US, we also think that there are some long-term companies that benefit from these long-term trends. So we are very much focused on some of these opportunities in Mexico.
You've only talked about Brazil and Mexico today. Does that mean you wouldn't invest in any other countries within Latin America?
Amit Goel: If you take out Brazil and Mexico - we are talking about Chile, Argentina, Colombia, and Peru. We look at companies in some of these economies, especially banks. This is because we run large funds and we can't invest in smaller companies. As a group outside of Brazil and Mexico, it's a very small part of our universe and even more volatile than what you see in Brazil and Mexico. So I think there are few opportunities in these countries. They are small and more volatile. We have to be very selective outside Brazil and Mexico.
What risks do investors need to be aware of when investing in Brazil and Mexico?
Amit Goel: I think the biggest risk we need to be aware of is cyclicality. Brazil is still very much tied to some of the commodities. If you see a significant correction in some of these commodities, that has a negative impact.
The political environment becomes unstable a lot, and stable at other times. So you have to think about political cycles as well.
Mexico is going through an election this year. What happens? Who gets elected? Does it mean policy change? How does it work with the US? You have to worry about some of these things.
Brazil went through elections last year, so I think there's some political continuity there. So I think I would say the cyclicality of markets and political cycles are the two things that investors need to be aware of when they invest in Latin America.
