THE mood in global markets may have left investors feeling uncertain, but there are opportunities in even the most negative of times, says Pendal emerging markets manager James Syme.
Right now, the sometimes overlooked markets of Latin America are a bright spot in a world worried about inflation, interest rates and war, says Syme.
“In the first four months of the year, when global emerging markets were down 12 per cent, Latin American stock markets rose 11 per cent.
“And it’s more than just a market move — the underlying fundamentals are looking pretty good.”
Latin America often flies under the radar of investors, partly because its commodity-exposed economies are subject to boom-and-bust cycles that can leave investors vulnerable to swift capital outflows.
But in the face of global uncertainty, big Latin American economies like Brazil and Mexico are doing well.
“We’ve seen GDP growth expectations revised upwards as economic data comes in relatively strongly,” says London-based Syme, who co-manages Pendal Global Emerging Markets Opportunities fund with Paul Wimborne.
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“For some investors, that’s been a surprise. People have thought that a stronger US dollar and higher bond yields will start to really drag on Brazil.
“But it has its own internal cycle, which has been reasonably strong.”
Syme says Brazil is seeing strength across the board in services, retail sales, consumer confidence and credit growth.
“It’s probably the strongest credit environment in any emerging market,” he says.
The underlying support for the strength is commodity exports.
Brazil is a significant oil producer and produces commodities like pulp and paper as well as metals.
“Brazil is also a huge food exporter. One element that’s been overlooked is that with Russia and Ukraine going offline in terms of edible oil exports — and Indonesia putting a palm oil export ban in place — that’s about 50 per cent of global edible oil exports taken offline.
“One of the big alternatives to palm oil is soy — and Brazil is a major soy exporter.”
“The whole commodity export side from Brazil is really robust. And that’s happening at the same time as the domestic cycle is picking up,” says Syme.
Brazil’s policy response to the booming economy has been significant interest rate hikes, leaving it well placed to weather increases in global bond yields and a higher US dollar.
Syme also points to Mexico as an example of boom times in a sometimes overlooked market.
“Mexico is a very high quality, stable market. I’ve seen it characterised as boring, but sometimes boring is good,” says Syme. “In a difficult world, it’s got a relatively high return on equity and good corporate governance.”
Mexico is a large domestic crude oil producer, which reduces the economic risk of higher oil price.
And it’s a beneficiary of strength in the neighbouring US economy.
“These inflationary pressures we’re seeing in the US are a reflection of a strong economy — that’s just a huge benefit for Mexico.
Again, like Brazil, the central bank has been hiking rates.
“But they’ve remained highly orthodox through the inflation spike. There probably will be some more hikes ahead but again, we’ve probably seen bulk of what needs to be done,” he says.
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Underpinning the Mexican stockmarket is a big domestic pension fund industry with assets equal to 25 per cent of GDP.
“They’ve been increasing their allocation to domestic equities.”
And remittances — largely from the US as Mexicans abroad send money home — are supporting the economy, up 13 per cent year on year in March.
There are risks, says Syme.
The traditional threat to Latin American markets is politics. Brazil is due for an election in October and a win by the left-wing candidate may be a challenge to some parts of the Brazilian equity market. But Mexico is already under a left-leaning government and performing well.
“We are comfortable in both cases,” says Syme.
“Emerging markets go right or wrong at a country level and a lot of what happens is around economic cycles and how they interact with global economic cycles.
“Booms in emerging markets can be quite sustained.
“And while valuation alone is not an investment case, most of MSCI LatAm looks pretty reasonably valued in a world where a lot of assets don’t.”
James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.
The fund aims to add value through a combination of country allocation and individual stock selection.
The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
The stock selection process focuses on buying quality growth stocks at attractive valuations.
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