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Thomas Smith
Thomas Smith 01-07-22

The investment case for Latin America

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

Latin America has been one of the best performing markets globally in the first half of 2022. It was already benefiting from high commodity prices and this trend has been reinforced by the Russia/Ukraine conflict. Countries in the region have seen a sharp improvement in their terms of trade (the price of exports relative to imports) and with limited economic ties to Russia should see minimal disruption. The region’s commodity exposure is broad ranging, from oil exporters (Brazil and Colombia), through exporters of industrial and precious metals (Brazil, Chile, Mexico, Peru) to soft commodities and agricultural products (Argentina, Brazil, Chile, Mexico).

Many countries had seen their equity markets underperform meaningfully last year and currencies have been very weak since the outbreak of the pandemic. In real terms, the region’s currencies are not far from the lows seen in previous crises despite the significant improvement in the terms of trade, and the MSCI Latin America Index has fallen to a 30% discount to emerging markets on forward price to earnings (Latin America is on just seven times forward earnings), having historically traded at a small premium.

The discounted valuations and strong earnings momentum make Latin America a compelling investment proposition. Already this year, earnings estimates have been revised 42% and 32% higher for 2022 and 2023 respectively. This comes on top of 2022 earnings estimates being revised 21% higher over the course of last year and stands in stark contrast to the negative earnings momentum seen in the broader emerging markets.

The main risks from the conflict in Ukraine are a more severe impact on global growth and higher and more sustained inflation, which could lead to both a steeper and more prolonged hiking cycle in the US. Unlike in most Fed tightening cycles, Latin American central banks have been more proactive in raising interest rates and have been tightening for some time (Brazil has hiked rates by 10.75% over the past 15 months). This should leave them less vulnerable and better positioned for higher rates than at the outset of any previous Fed cycle.

As often seems to be the case in Latin America, domestic events exacerbate global trends. As the macro backdrop has improved with sharply higher commodity prices, so too the political landscape in Brazil has become more constructive. Former President Lula is leading the polls for October’s presidential election and is looking to be more business friendly than previous Workers’ Party administrations. He has already distanced himself from the far left of his party and left little doubt that he will adopt pragmatic, centrist policies if re-elected.

The most important confirmation of this is Lula’s decision to select former Sao Paulo Governor Geraldo Alckmin as his running mate, who would then be his vice-president. Alckmin, and the centre-right PSDB party that he founded in the 1980s, have been in opposition to Lula’s Workers’ Party for decades, but this alliance reflects Lula’s understanding that to get elected and be able to govern the country effectively he needs to look beyond his leftist base. This increases the likelihood of at least a modest reform agenda which Brazil is still in need of to shore up government finances and raise economic growth potential.

The global and domestic trends are supportive for Latin American economies and markets, and valuations and currencies remain cheap. As the war in Ukraine drags on, Latin America is almost uniquely positioned in being geographically and economically insulated from the conflict while benefiting from the high commodity prices that are likely to persist.

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KEY RISKS

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in the Fund involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates.

DISCLAIMER

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.

Thomas Smith
Thomas Smith
Thomas joined Liontrust in October 2019 as part of the acquisition of Neptune Investment Management, where he started his investment career. Thomas has a Master’s degree in Chemistry from Oxford University.

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