Sunday, December 17, 2017

All eyes on Latin America

Latin America (LatAm) has been identified as one of the better performing Emerging Markets following the region's resilience throughout the global financial crisis. The Latin American sphere has reaped the benefits of sound macroeconomic policies, low levels of indebtedness and an increasing demand for the region's export commodities. The major downside risks dampening growth in the region and by extension, the world, is the European debt crisis.

In this article, we at Bourse will cover a review and outlook of the key Latin American nations Brazil & Mexico.

LatAm Review

Year-to-Date (YTD) the index that measures Latin America performance was down 0.86 per cent however, it still outperformed the Emerging Index which was down 3.11 per cent. Latin America's Gross Domestic Product (GDP), the benchmark for economic growth, progressed in line with Emerging Markets growing at a rate of 3 per cent in 2012. The economy has also experienced higher growth than Advanced Economies and the Euro Area with 1.3 per cent and -0.4 per cent growth respectively.


Brazil has the fourth largest Securities Exchange in the Americas and the largest in the Latin American Region, the BM&F Bovespa, valued at USD$1.4 trillion as at the end of February 2013. Over a 4-year period, the IBOV (the main index for Brazil Equity Markets) gave an average annual return of 21 per cent, demonstrating the potential of this single LatAm market.

Brazil is trading at an attractive P/E of 11.32 times; below its historical average forward P/E of 14.29 times, indicating that the market is currently inexpensive. Although the Brazil market is down YTD this presents a good entry point for investment.

Over the past decade, Brazil has emerged as a leading emerging nation with robust growth rates, strong domestic demand, low Debt-to-GDP ratios and high levels of International Reserves.

There has been a marked improvement in the Debt-to-GDP ratio from 60.6 per cent in 2002 to 35 per cent in November 2012 as reported by the International Monetary Fund (IMF). Over US$45 billion in Foreign Direct Investments (FDI) was pumped into the economy in 2012.


Mexico, the second largest economy in the LatAm space, is heavily reliant on oil exports and trade with the US. In the face of the eurozone crisis and the softening of the US economy in 2011, Mexico's growth rate dwindled. However, like Brazil, the economy rebounded quickly, with growth supported by strong domestic demand and skilful policymaking. Mexico reported GDP growth of 3.8 per cent in 2012. The economy has been able to maintain a stable interest rate of 4.5 per cent for the last four years, with a recent cut to 4 per cent on March 8, 2013, taking borrowing costs to a new record low.

In 2012, Mexico's MEXBOL (the main equity index for the Mexico) reported returns superior to the US and UK (Exhibit 2). The MEXBOL boasts an attractive 4-year average annual return of 28 per cent.

LatAm Outlook

The Latin America market is trading at a forward P/E of 13.1 times; below its 5-year historical average forward P/E of 13.65 times, an indication that there is still opportunity for value in the region.

GDP growth for Latin America economies for 2013 and 2014 is expected to be 3.6 per cent and 3.9 per cent respectively, again outperforming Advanced Economies and the Euro Area (Exhibit 3).

Looking ahead, Brazil will be hosting both the 2014 FIFA World Cup and 2016 Summer Olympics. Total Gross Economic impact from hosting the two events is projected to be more than US$120 billion. The hosting of these two major events is expected to increase infrastructural developments, create employment, boost the construction, tourism and electricity industries and increase modernisation, efficiency and the ability to lure increased foreign investments.

Projected GDP growth for 2013 and 2014 is estimated to average 4 per cent. On the currency side the Real is expected to remain stable over the next three years, averaging 2.03 Reals to 1 US Dollar.

Analysts at Wells Fargo Securities believe that infrastructure investment will be the driving force for Brazil's equity market in the long-term as the economy continues to modernise. Both Credit Suisse and Morgan Stanley reaffirm their confidence in the Brazilian Equity market. From the current level of 55,576 Credit Suisse expects the Bovespa to appreciate 26 per cent while Morgan Stanley expects an appreciation of 17 per cent for 2013.

In Mexico the prospects for the passage of policies that further strengthen the country's fiscal room for manoeuvre and medium-term growth have improved under the administration of President Enrique Pena Nieto. One of the major changes is to open the state controlled energy industry to more private investment in an attempt to boost economic expansion. Mexico's credit rating outlook has been raised from stable to positive by Standard & Poor's on March 11, 2013 to a BBB rating.

As a result of its economic ties and heavy dependence on the US, Mexico's near term outlook is supported by the expected continued recovery in the US and solid domestic demand growth. Credit Suisse expects the MEXBOL to appreciate approximately 8 per cent from current level of 42,531.


All in all, the global economic outlook improved in the last quarter of 2012 with the continued decline of global financial tensions and with the agreement to avoid the "fiscal cliff" in the US. The future of the LatAm region looks promising and it is clear that the region is capable of competing against the world as one of the more lucrative emerging markets. Bourse has recognised the value to be had in this region and is eager to present a new and exciting investment opportunity to investors. Find us and like our page on Facebook at Bourse Securities Ltd to keep informed as details unfold.