While developed economies mire themselves ever deeper in anti-growth policies, Latin American trailblazers are tearing down barriers to progress across the region. Founder of investment management firm Tell-Tale Advisors Tom Landstreet gives us the rundown of why he is staying bullish on the region.
Don’t be distracted by Brazil’s corruption-tainted Olympics and presidential impeachment proceedings.
Ignore the disaster area that is Venezuela – for now. Behind the doom-laden headlines, there are real reasons to be bullish on Latin America.
A number of nations, including Mexico, Argentina, Colombia and Peru, are enacting pro-growth economic policies that will drive the region’s economic growth to among the highest in the world.
There’s even a chance that the gravitational pull will drag Brazil and Venezuela up as well. As growth accelerates in neighboring countries, pressure on those governments to liberalize will increase.
This investment theme should play out over several decades, and though Latin American indexes have soared this year, I believe there’s much more to go.
In April I predicted Pedro Pablo Kuczynski (PPK) would be elected president of Peru and that it would be the best possible outcome for investors. PPK won by only 50,000 votes over Keiko Fujimori, whose largely pro-growth party still controls congress. Peru should thrive under this government.
As the presidents of Mexico, Argentina and Colombia convened to commemorate Kuczynski’s inauguration, I couldn’t help but notice a certain self-awareness among this crop of free-market pioneers. Since the election of Argentina’s Mauricio Macri gave the movement real momentum, these leaders have moved quickly to coalesce, enacting a round of new trade agreements.
Trade tariff tangle
One of the most critical areas of reform is tariffs. These have long been an effective tool for despotic
Latin American leaders to maintain their political power. Byzantine tariff structures allow leaders to control their enemies and reward their allies, penalizing growth by restricting economic activity.
Cutting the tangled web of tariffs was critical to Chile’s turnaround in the 1970s as well as Peru’s turnaround in the 1990s. Both countries led the world in GDP growth subsequently.
Argentina’s newly elected Macri’s first act was to cut onerous 30% export tariffs on practically everything the country produces to nothing. A production revolution is already under way as Argentina’s agriculture sector will double its output within just a few years.
Here’s a great example of how dramatically producers respond to government economic policy incentives: as Macri ran for office promising to cut tariffs on corn exports, farmers immediately began hording their crops.
In his first act as president, he did just that. Two things happened: farmers quit hoarding and sold an estimated $13 billion worth of corn in the US, driving down prices in the futures market.
Then, in the closing minutes of the planting season, Argentine farmers planted 40% more corn acreage than last year.
In Mexico, President Enrique Peña Nieto’s government continues to divest its ownership of Pemex assets, bringing in billions of dollars in foreign investment and assuring that Mexico’s oil production will increase from recently depressed levels.
The new drivers of growth
In a widely publicized recent speech, Colombia’s President Juan Manuel Santos rolled out the red carpet to Western firms, unabashedly inviting them to invest in the development of the country’s resources.
This is a marked departure from the ‘blame the West for our travails’ approach of prior leftist leaders. While the economies of the US and Europe suffer from increasingly anti-growth government policies, Latin America will likely supplant them as the global beacon of policy-led growth.
It’s possible to buy ETFs covering the countries I’ve mentioned, though some are thinly traded.
A good alternative way to gain exposure is to buy shares in local banks. The larger banks have a greater market cap than the country ETFs.
Also, owning shares in a local bank gives you exposure to the growing economic activity taking place within the bank’s market. I like Banco Macro in Argentina, Peru’s Credicorp, and Bancolombia in Colombia.
This article was originally published in the September issue of Citywire Americas. To sign up to receive our free magazine, follow this link.