Amid a climate of uncertainty and transition, global investors have been turning their attention to Latin America. Head of Credicorp Capital Asset Management James Loveday explains why
There are several reasons why Latin America should be on your radar when thinking of diversifying your portfolio. To begin with, the global economy is expected to enter an expansionary phase during the first half of 2021. And, as vaccines are deployed globally, it is expected to rebound sharply in the second semester of 2021. In such a scenario, cyclical sectors will be supported by high demand from China and the United States as both implement their green agenda. Latin America is expected to benefit from rising commodity prices and improving terms of trade. Commodity related sectors represent approximately 30% of the CEMBI BD Latam and around 33% of the MSCI EM Latin American Index, while countries intensive in base metals and oil production like Peru, Chile, Brazil, and Colombia are set to receive the windfall from this renewed commodity boom. Upward revisions in economic forecasts for Latin American countries are driven by these expectations and are accelerating compared to other regions.
Another factor is the manageable debt levels and fiscal deficits, which are likely to further improve in a post-pandemic scenario. Latin American countries have maintained debt levels under 70% of GDP on average, compared to developed economies, with levels that will exceed 120% of GDP in the coming years. Latin America is resilient, constantly finding a way to overcome adversity. Fiscal consolidation during 2021 and 2022 is the key to stabilising debt dynamics.
Then we come to “relative valuation”, which is very attractive. Latin American corporates still have a relative advantage in spread basis against emerging market (EM) and Asian corporates. After adjusting for leverage levels, Latin America offers the best risk-reward profile within global corporates. From the equity perspective, the Latin American stocks trade at around a 20% discount to their history, compared to global and/or EM Asia stocks which trade at 30% premium to 2021 earnings. Furthermore, Latin America will also be well positioned to receive massive flows from excess liquidity in developed countries and from portfolio rotation towards cyclical growth, value, and emerging markets overall.
Something that does not come immediately to mind when thinking about Latin America is technology. The region has often seemed outdated, yet the pandemic is driving it to catch up faster than ever. Last year, Latin American companies had to adapt to life under lockdown. This accelerated technological changes to their processes and services, empowering a tech sector that had always felt a step behind. The great thing about springing into action is that they do not have to go through entire development cycles to create this type of technology, particularly within e-commerce, fintech or edtech. Instead, local firms are taking advantage of their local strength to implement similar strategies and succeed. This is the case of Mercado Libre, for example, which has become the largest company in Latin America by market capitalisation. With local governments continuing with lockdown measures, it is expected that tech companies will continue to become more integrated with everyday life and become drivers of modernisation across the region.
Experience takes you further
When your health is at risk, you do everything to receive the best care possible. This pandemic has shown how being prepared can pay off significantly, even when it comes to the health of your investment portfolio. Credicorp Capital Asset Management believes that you deserve the best financial services to meet your portfolio and asset allocation goals.
Credicorp Capital Asset Management has over 50 years of accumulated experience investing in Latin America and is part of Credicorp Ltd., a financial services leader in Latin America that has over 130 years of experience. Together, with its expert team located in Chile, Colombia, Peru, and the US, the company has been able to successfully execute and monitor best investment opportunities in Latin America. This has been proven by Credicorp’s portfolio managers being ranked first in ‘Emerging Markets Latin American Bonds’ by Citywire Selector for their rolling 5-year risk-adjusted performance.
Having local presence means Credicorp Capital Asset Management has an extensive network of local and regional contacts with access to business leaders, public sector, consultants, and intermediaries. This allows the team to actively track the companies in the region to include them in their fundamental risk analysis, focused on sound investments. To bring investors the best products, the company has an integrated investment process where sustainable alpha generation with environmental, social, and governance (ESG) factors is among their top priorities. Therefore, generating a healthy environment where they see their investments succeed.
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