Despite political troubles in Venezuela and Brazil, Latin America’s economy is a broadly positive story with small pockets of unrest, according to Jim Barrineau, co-head of emerging markets debt at Schroders.
“Foreign exchange reserves are rising, countries are stabilizing, central banks have had the ability to cut rates in Brazil, in Chile, in Colombia. In Mexico, we expect them to be able to cut rates in the next few months,” says Barrineau.
Mexico has lagged in this positive trend as “NAFTA noise” has created investor anxiety. But things look set to move forward “as investors realized the NAFTA negotiations weren’t going to be devastating for Mexico,” he says.
Mexico’s upcoming election is of particular interest. Barrineau notes candidate Andrés Manuel López Obrador is the anticipated winner. “He’s widely perceived to be a leftist, which would be a bit of a shift from the rest of the region, but even there, he’s recruited some mainstream economists. He’s promised not to roll back a lot of the oil sector reforms, so even if he were to be elected, we don’t think it would be a disaster.”
According to Barrineau, populist sentiment has waned in the region. “Peru basically elected an economist as president, which was another positive,” he says. “So essentially the region has gone to the reverse of populism, much more orthodox policy making, and that has really put some stability into the region.
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“There are a bunch of corporates in Brazil right now that look attractive. The beef sector is much more an international sector. Investors would probably be surprised at the level of diversification they are able to achieve via exports and subsidiaries in other countries.”
When it comes to Canadian activity in the region, the Canada Pension Plan Investment Board has recently made some moves in Brazil. “The country has an improving economy, and the current market presents an attractive entry point,” said Hilary Spann, managing director and head of real estate for the Americas at the CPPIB.
The pension fund recently concluded a portfolio exchange transaction, acquiring a 33 per cent stake in Cyrela Commercial Properties’ office portfolio in Brazil and Cyrela taking the fund’s 50 per cent stake in their existing logistics joint venture, CCP Logística Empreendimentos Imobiliários.
Cyrela focuses on development and management of upscale commercial properties. Both the CPPIB and Cyrela have also jointly committed $500 million to a new joint venture to further invest in high-end Brazilian office properties.
“We see attractive long-run growth prospects in Brazil and Latin America as a whole and we are committed to being a long-term investor in the region. For the real estate team, this is a significant transaction in that it provides us with immediate scale in some of the most attractive office assets in Brazil, and we are able to do so with a long-standing partner in the region,” said Spann.
As for other countries, “we find Argentina dollar debt to be pretty attractive,” says Barrineau.
“The big picture is, President [Mauricio] Macri took office, initiated some reforms that are beginning to roll back some of the damage the Kirchner years did to the economy,” he adds, referring to former president Cristina Fernández de Kirchner. “Again, progress has been slow there, but now we’re seeing the first signs of pretty decent growth and inflation should be coming down shortly. . . . On the dollar-debt side, you can get a seven to 7.5 per cent yield, which in this world is still quite attractive.”
The mining sector in Latin America operates at low cost and thus has an advantage over other players, especially when commodity prices are depressed. “We think they are very well run and commodity prices are stable to higher,” says Barrineau, noting that further growth in developed markets will only benefit the region.
Oil looks especially interesting throughout the region, according to Barrineau. “Pretrobras . . . is really a long run turnaround story for us,” he says, referring to the Brazilian company. “For many years treated like a piggy bank for the state, it’s now under new management and they’re deleveraging the company, selling assets.”
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Mexico is also reforming its oil sector. “You’re seeing some foreign private participation in the sector. We think production will begin to pick up with joint ventures from private oil companies,” says Barrineau, noting the opportunities in other countries as well.
“I do think that smaller oil-producing countries like Ecuador are really also under-the-radar surprise stories,” he says. “Ecuador also had a recent election. The president there is doing some surprisingly positive things. He’s trying to reorganize the oil sector, cut spending, and the country has basically said they’d be free of the OPEC production limit and they want to increase their oil production.”
Ecuador was the first member of the Organization of the Petroleum Exporting Countries to publicly admit, in July, that it wouldn’t meet the latest round of production curbs.
“I think if oil prices recover or even go to the top part of their range of [$50 to $60], that’s going to be very good for countries like Peru, Colombia and Ecuador,” says Barrineau.
Severe economic instability in Venezuela is an isolated issue, he adds. “We don’t think there will be much fallout to the region for now. There is some fallout to Columbia in terms of refugees coming from Venezuela just trying to flee the country, and it’s creating a little bit of a problem in Colombia, but it hasn’t really grown into a macro problem yet.”
At oil’s current price, Venezuela will likely remain economically unstable given its reliance on petroleum exports, according to Barrineau.
“The biggest risk, I think, just for emerging markets in general is if the U.S. dollar were to begin to appreciate instead of depreciate. I think that would draw liquidity out of the region and back into the U.S. and currencies would probably fall,” he says.
The CPPIB, meanwhile, says it continues to see solid prospects for the region. “We are attracted by the strong fundamentals in [Latin America] and we see good prospects for long-term growth,” said Spann. “We also have an advantage, because as a patient and long-term investor, we can stay the course on investments through business cycles in a way that other investors cannot. We have been investing in Latin America since 2006, and as of June 30 had $9.9 billion of assets there, representing about three per cent of the CPP fund’s total assets.”
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