As South America emerges from its 2016 economic slump, the team behind the $1.2 billion Aberdeen Latin America Equity fund is betting on a Brazilian tech shop and other firms tapping into the region's domestic growth.
After contracting by 1% in 2016, Latin America is expected to grow by 0.8% this year on the back of improved commodity prices and as Brazil and Argentina emerge from recession, according to BBVA Research.
Led by emerging market veteran Devan Kaloo, Aberdeen Standard's Latin American fund had a 59% allocation to Brazil as of August.
Peter Taylor, a senior investment manager and member of Kaloo's team, said they have not retreated from the country despite a series of ongoing scandals. Most recently, on Thursday, the prosecutor general's office had charged Brazilian president Michel Temer with racketeering in connection with a bribery case. Temer has denied the charges.
‘If anything we took the opportunity to selectively add to long-term holdings where a valuation opportunity emerged,’ Taylor said, adding: ‘The initial signs of recovery in the economy, improvement in employment conditions, coupled with a declining interest rate environment are supportive for the domestic themes.’
Due to attractive valuations, Taylor said the team bought into Brazilian technology solutions provider Linx this year.
The firm boasts a 40.2% market share of the country’s retail management software space and offers tools for order management, logistics and other applications, according to its website.
‘The company is well-placed to benefit from the formalization of Brazil’s retail environment, as well as the increasing demand for IT services from local corporates,’ Taylor said.
Other firms that have tapped into Brazil’s domestic growth story include fashion retailer Lojas Renner, and lenders Banco Bradesco and Itaú Unibanco.
Turning to Mexico, Taylor said he expects resilient local consumption to benefit its holdings in Walmart's local division Walmex, Coca-Cola bottler Femsa and lender Banorte.
In Argentina, the managers bought shares of bank BBVA Frances, which Taylor described as ‘a well-run and conservative lender with good growth opportunities.’
Taylor said the outlook for Latin American equities remains positive for the year as business-friendly governments in countries such as Brazil, Peru and Argentina continue to push reforms. But he's keeping an eye on politics.
‘Domestic politics will certainly continue to play a role in shaping the region, particularly with presidential election season arriving in Chile, Mexico and Brazil over the course of the next year.
‘In addition, the trajectory of Donald Trump’s policy changes, the pace of interest rate hikes in the US and the unpredictability of oil prices could all have implications for Latin American markets.’
As of August 2017, the fund's largest country allocations after Brazil were Mexico with 22.6% and Chile with 9.8%. Financials captured 27.8% of assets, consumer staples 22.2% and consumer discretionary 12.9%.
It had returned 23.81% in the year ended August 31, while its Citywire-assigned benchmark, the MSCI EM Latin America TR USD, rose 23.05%.