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US corporates target LatAm's new dawn as opportunities abound

US corporates target LatAm's new dawn as opportunities abound

Following a shake-up of Latin America’s ruling elite the US appears to be initiating a new era of dialogue with the region – President Barack Obama’s recent visit to Argentina and Cuba being prime examples. What does this new openness to Latin America mean for the US and its multinationals? We asked three fund managers for their view on which companies and sectors are set to benefit.

PAUL EHRLICHMAN

Clearbridge Investments
Fund manager and head of global value equity

Key takeaways:

  • LatAm needs to follow the Asian model
  • US consumer companies could be big winners
  • US companies could relocate manufacturing

We are at that point in the cycle in Latin America where, having made a mess of it politically with the growth of the state rather than the private sector, businesses are going to escape the boom-and-bust trend.

The question is, are governments going to return to state-led growth, where certain industries are favored and you have to play ball with big government agencies and companies focused on a few largely extractive and low value-added industries, or will they follow the Asian model?

Right now, Asia is relying more on domestic demand and an emerging middle class, allowing companies to come in and invest in businesses. We’ve seen a bit more of that in Mexico, but Mexican stocks aren’t particularly cheap at the moment.

US companies, seeing these stars aligning, can look at the positive fundamentals in Latin America: they have water, they have land and they have a young population. It’s in a great hemisphere for serving North American and global markets, and commodity prices are bottoming, which will be helpful. It looks like the market is turning around.

The change in Argentina, in particular, is positive. Brazil remains a mess, but with the light they are shining on all the corruption in the country maybe things will soon get better there as well.

Which US companies will benefit from this? Many consumer product companies, whether it’s Procter & Gamble or beverage companies, are already there. Restaurant chains could also expand into Latin America. I do think agricultural companies can benefit as well, such as John Deere and Caterpillar.

As these countries begin to see capital return there is a massive infrastructure need, and not just in the extractive industries but in farming, construction and housing.

Cement and roofing companies could also move some manufacturing there.

Companies such as V.F. Corp could sell more apparel in the region, but they could also manufacture more there as currencies are very competitive at the moment.

RALPH BASSETT

Aberdeen Asset Management
Head of North American equity

Key takeaways:

  • Regulatory changes could open doors to US companies
  • Investors need to be brave and take a long-term view
  • Currency weakness presents opportunities

Brazil is the elephant in the room. Historically it’s been a focal point for US companies largely because of the size of the population and the underlying growth in the economy (excluding the past two years), specifically in agriculture and energy output.

The economies of Argentina and Peru are less developed, so there’s been fewer opportunities for American companies to infiltrate.

The government in Brazil has been an issue for some time. Even more important is the fact that even as Brazil has opened its economy it is still trying to support its domestic industry, which has caused a lot of issues for American companies. For instance, energy companies have had to ensure that 70% of their product is made by domestic Brazilian companies; it was the same for companies like John Deere.

This meant they’d have to commit to having an on-the-ground presence, leading them to spend a lot of capital to comply with local laws.

My feeling is that they will become looser on these kinds of regulations as they turn to service industries. We are seeing this somewhat in China, and Brazil will get there over time, but they’re still trying to wean themselves off from being a domestic-oriented manufacturing economy.

Over the past 18 months, the scary part for US investors has been the fact that you’ve had very weak demand, specifically in Brazil and Argentina. There’s been high inflation in these markets, but you’ve also had really strong currency headwinds for US investors.

The combination of lower underlying earnings and currency movements has made these investments look quite poor for the past two years.

It is necessary to take a longer view and see that over time these economies are going to prosper. For instance, in Brazil the agricultural market has been decent.

Some companies have recently taken advantage of the weakness in currency and in the underlying market. We have Compass Minerals, which recently bought Produquimica Industria e Comercio. To make those investments at this point you have to be brave, and that really does require a long-term view.

BURNS MCKINNEY

Allianz Global Investors
Fund manager

Key takeaways:

  • Opportunities for US investors in Argentina’s banks
  • Focus on countries with growing middle class
  • ETFs are not the solution to tap the region

Argentina should ultimately become a more fruitful place for multinationals. With Maurico Macri replacing Cristina Kirchner, the country will have the best government they’ve had in a long time.

There are a lot of sectors that are deeply under-invested, such as telecoms. They have very low quality there and this sector hasn’t seen much direct foreign investment compared with its Latin American peers.

At a time when corporate debt levels have been rising in Latin America, they’ve actually been falling in Argentina. It’s an under-banked country. It seems like there is a lot of room for improvement so the change of government is a card US investors should take advantage of.

Brazil is a country that a lot of people are talking about, and we’ve seen stocks rocketing there this year. There are no easy fixes: they have a high tax burden and their GDP is dropping. The central bank is not independent so even if Brazil gets a good government in place, the same low-hanging fruit is not accessible there like it is in Argentina.

However, there are some positives. Brazil has a better demographic than, for example, China and a growing middle class. The same goes for Argentina, and US investors should look to focus on countries with a growing middle class. We are witnessing a shift in these countries, so you can’t just buy the ETFs: you have to be very selective.

As far as the fundamental risk for South American countries, historically the US was the dog that wagged the tail of Latin America; now it’s China.

That’s hurt the region because of declining commodity prices. Places such as Chile, Colombia and Peru did a much better job than Argentina and Brazil at handling that, and today they don’t have the same level of rising deficits as these Latin giants.

This said, I think once Argentina moves past Peronist politics it has some positives. The other Latin American giant, Mexico, is steered by the US economy. With the US economy growing, that will definitely be a positive for them.

This article was originally published in the May issue of Citywire Americas. To sign up to receive our free magazine, follow this link.

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