Latin American Stocks: Dancing to a Faster Beat
Emerging markets have languished for the past five years, but they’re hopping again. Taking the lead is Latin America, where increasingly confident consumers are opening their wallets, commodity prices are shaking off their slump, industrial activity is back on track, and demand for indigenous agricultural products is resurgent.
In regards to Argentina in particular, I found the following letter from a reader both interesting and amusing. He refers to my March 29 issue, Can The Trump Team Shoot Straight On Defense?
“Your confession as to ‘bribing’ a colleague into commenting on future defense spending by giving him a bottle of Argentine Malbec brought a smile to my face. Several years ago I made 20 week-long business trips to Buenos Aires to lead a Turner Broadcasting Team in the purchase, design, construction, and start up of a major broadcasting facility in the city.
The locals introduced me to the Malbec wines grown and produced in the Mendoza region of the country. I have since adopted these wines as my primary choice for red wines. My only regret is not having taken the time out from one of my business trips to tack on several personal vacation days to travel the 500 miles east of Buenos Aires to this wine growing region.
Malbec was almost unheard of in this country 15 years ago. Its popularity certainly has exploded since. Thanks for the article. My defense industry investing will be cautious until I see more of a silver lining.” — Phillip G., Atlanta, GA
Investing in more than 630 million people…
Phillip, I too am a big fan of Latin American wines, which as you point out were unknown to American wine drinkers until recent years. Growing conditions in certain Latin countries resemble those of California’s Napa Valley: cool Pacific breezes and layers of ocean mist in the evenings and bright hot sunshine during the days, a combination that boosts the sugar content and subtle flavors of wine grapes.
Your letter got me to thinking about another under-appreciated aspect of Latin America: investment profits. While U.S. traders remain preoccupied with domestic markets and political wrangling on Capitol Hill, lost in the fray are the opportunities south of the border.
This year, for the first time since 2010, developed and developing countries alike are expected to rack up healthy growth rates. Rising oil and commodity prices, growing demand for semiconductors and technology, upbeat consumer sentiment, and busier factories are boosting the global economy.
The projected prosperity is pronounced in emerging markets. According to the France-based investment bank Société Générale, emerging market equities have climbed faster than the S&P 500 so far this year, gaining on average 12%. Yet they still trade at an historically low forward price-to-earnings ratio of less than 14. Latin America is a standout.
Stretching from the northern border of Mexico to the southern tip of South America, Latin America is home to more than 630 million people. According to the latest data from the Economic Commission for Latin America, the region will snap back in 2017 from a dismal 2016, making depressed stocks in the region a good buy now.
The commission forecasts that Latin America and the Caribbean will post gross domestic product (GDP) growth of 1.5% in 2017, compared to -0.9% in 2016; South America will grow 1.1% vs. -2.2%; and Central America and Mexico will grow 2.6% vs. 2.5%.
It’s happening in Monterey…
Emblematic of the region’s resurgence is Mexico.
If you’re worried that Trump’s bellicose policies and rhetoric toward Mexico will dampen that country’s prospects, don’t be. As a reverse barometer of Trump’s promises to crack down on Mexico, look no further than the Mexican peso.
The Mexican peso was the hardest-hit currency following Donald Trump’s surprise November victory, plummeting 10% from November 9 through the end of 2016 and another 5% during the first two weeks of 2017. But since mid-January, the peso has been climbing, rallying more than 6% against the dollar over the past month.
In the wake of the Trumpcare fiasco, investors increasingly question Trump’s ability to deliver on any of his promises, including his famous threat to build a wall along America’s border with Mexico (and to make Mexico pay for it).
You don’t hear about it very much in the mainstream press, which remains preoccupied with immigration, but Mexico’s export-driven economy is thriving. Mexico is the fourth largest auto exporter and the world’s eighth-largest producer of oil. Mexico manufactures and exports the same amount of goods as the rest of Latin America combined.
Mexico’s GDP jumped 2.4% on a year-over-year basis in the most recent quarter, compared to 1.9% for the U.S.
The best way to play the Latin boom is to buy shares of the iShares S&P Latin America 40 Index Fund (NYSE: ILF)
With net assets of $1.1 billion, the iShares S&P Latin America 40 Index Fund seeks to generate investment results equivalent to companies in the Mexican and South American equity markets as represented by the S&P’s Latin America 40 Index.
Top holdings include financial services giant Banco Bradesco (NYSE: BBD), beverage behemoth Ambev (NYSE: ABEV), mining king Vale (NYSE: VALE), and oil and gas “super major” Petroleo Brasileiro SA Petrobras (NYSE: PBR).
ILF’s year-to-date return is 13%; the expense ratio is a reasonable 0.49%. Over the past year, the fund has racked up a total return of 52%.
The eBay of Latin America…
As for individual equities in Latin America, I like Buenos Aires-based MercadoLibre (NSDQ: MELI), the region’s leading e-commerce player.
Latin America boasts an increasingly computer-savvy middle class and these consumers are flexing their newfound purchasing power online.
MercadoLibre’s home base of Argentina enjoys plentiful natural resources, a highly literate population, a diversified manufacturing base, and an abundant agricultural export market.
As e-commerce activity in Latin America explodes, MercadoLibre will reap the lion’s share of the spoils. Often referred to as “the eBay of Latin America,” MercadoLibre functions in the same manner.
MELI shares have risen nearly 36% year to date, with further growth momentum in the cards. The average analyst expectation is that MELI’s year-over-year earnings growth will reach a whopping 191.70% in the next quarter; 39.50% in the current fiscal year; 32.70% next fiscal year; and 30.77% over the next five years on an annualized basis.
MELI shares now trade at about $211. In late March, analysts at Barclay’s issued a “Buy” signal for the stock, with a one-year price target of $250, for an implied gain of roughly 19%.
To be sure, there still are reasons to worry about the global economy. President Trump’s “America First” policies could trigger a destructive trade war with Latin America; oil and commodity prices could swoon again; and overvalued U.S. stock markets could crash and take international indices down with them.
Nonetheless, the breadth of economic growth in Latin countries makes equities in the region a surprising value — as appealing as a $12 bottle of Doña Paula Malbec from Argentina.
Have a question, comment or… wine recommendation? I’d love to hear from you: firstname.lastname@example.org — John Persinos
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