Latin America has been identified as one of the better performing emerging markets following the region's resilience in weathering the global financial crisis. The Latin American sphere has reaped the benefits of sound macroeconomic policies, low levels of indebtedness and increasing demand for the region's export commodities resulting in higher growth rates than developed countries. Subsequent to the slight decline in growth as a result of the global financial crisis, the region regained its momentum, surpassing advanced economies and global growth rates in 2010. Figure 1 depicts the recovery in select Latin American countries after 2009. The International Monetary Fund (IMF) projects that the region's economy will expand by 4.7 per cent in 2011. Latin America has been thriving following the price surges of mining products, increasing levels of consumer demand and capital inflows for the past quarter. In this article, we will review the opportunities in Brazil, Mexico and Peru.
Latin America's key players
Brazil
Brazil-the largest South American economy-is perceived as a future global economic powerhouse and is a member of the noted BRIC grouping. For the past decade, Brazil has been booming owing to its abundance of natural resources, macro-economic stability and low levels of indebtedness. According to IMF forecasts, Brazil's economy is expected to expand by 4.5 per cent this year. Brazil is a popular investor destination and holds a BBB- foreign currency long-term rating, with a positive outlook. However, rising inflation has been a concern and Brazil faces the challenge of harmonising its macroeconomic policies to stimulate growth and ensure economic stability. The Brazilian central bank has increased its benchmark interest rate, the Selic rate, to 12 per cent in an attempt to reduce the current inflation rate from 6.3 per cent to meet its 4.5 per cent target. The government has also employed other tools to curb consumer inflation, such as reducing government expenditure, raising taxes on consumer loans and increasing the reserve requirements of banks.
Peru
The Republic of Peru has been resilient to the effects of the global financial crisis and has a buoyant economic outlook for this year, with growth estimated at 7.7 per cent (IMF). Peru possesses an abundance of natural resources, being one of the major global suppliers of gold, silver and copper. Consequently, the recent hike in commodity prices has significantly increased the country's export earnings. Peru's growth can also be attributed to booming domestic consumer demand and the government's strategic trade liberalisation policies. Unlike other Latin American countries, Peru has been experiencing relative price stability, with a 2.66 per cent inflation rate for March 2011. The second round of Peru's presidential elections is carded for June 2011, which has resulted in heightened political uncertainty. This is reflected in Peru's LIMA Equity Index, which declined by 8.0 per cent on a year-to-date basis. Peru's national currency, the Peruvian So, has remained relatively stable in 2011 depreciating by just 1.0 per cent.
Mexico
Mexico traditionally has maintained very close ties to the United States, given that the US is its major export market (82 per cent of February's exports went to the US) and prime source of foreign direct investment. This relationship inevitably increased Mexico's exposure to the financial crisis, as it followed the United States' economic performance and plunged into recession in 2009. Nevertheless, in 2010, the economy recovered propelled by Mexico's domestic growth, improved consumer confidence and increasing oil prices. Mexico's strong pace of growth is expected to continue with the IMF anticipating a 4.6 per cent growth rate for 2011. Mexico has also been experiencing low levels of inflation considering its March 3.04 per cent rate was on par with the central bank's 3.0 per cent target for 2011. Additionally, Mexico has maintained its BBB long-term foreign currency credit ratings with a stable outlook for the future.
Opportunities
In the first quarter of 2011 the MSCI Emerging Markets Latin American Index outperformed the local stock indices of Brazil and Mexico. As Figure 2 illustrates, Peru's LIMA Index outperformed the MSCI. Political uncertainty has dampened the positive surge in Peru's LIMA Index, which would have been substantially higher in the absence of political event risk. For investors who want to avoid the volatility of the equity market, Latin American bonds are worthy of consideration. Latin American sovereign bonds are relatively safe instruments, owing to the positive growth trends of these countries and their low levels of indebtedness. However, there are many Latin American corporate bonds which carry their native country's sovereign rating, while offering yields in excess of the sovereign. For those investors who are comfortable with higher risk exposure and the corresponding returns associated with higher risk levels, Latin America's corporate bond issues may be a viable option. Several Fortune 500 companies are located in the Latin American region, including Petrobas, Banco de Brazil and Vale. Their bond offerings can provide investors with high quality fixed income investment alternative which still offer attractive yields. Similarly, other commodity based issuers, such as Southern Copper Corporation and MexiChem offer attractive yields when compared to their respective sovereign USS curves. The yield on Brazil's Vale Industries bond issue is around 4.50 per cent, while Peru's Southern Copper Corporation has a 4.00 per cent yield to maturity. Mexican energy-based firm MexiChem's roughly 6.00 per cent yield is also attractive in the current international interest rate environment.
Conclusion
The Latin American region has weathered the financial crisis well and their economies are continuing the trend of sustained growth. For international investors seeking new opportunities, emerging economies such as Peru, has joined the ranks of Brazil and Mexico in offering competitive investments in the short and medium term. Yet again, we recommend investors seek consultation from a qualified investment adviser before undertaking any investment ventures.