Latin America’s Economic Dawn
I was watching a cable news story last night about the southern border of the United States that was such a caricature of our Latin neighbors, it made me think of Woody Allen’s Bananas.
You wouldn’t know it from the U.S. media’s cartoonish news coverage, but there’s a lot more to Latin America than struggling asylum seekers in sombreros.
Latin America is on the cusp of a multi-year economic boom that will hand huge gains to investors who act now. Below I examine the investment appeal of the region, with an emphasis on the most promising sectors.
With a population of about 652 million, Latin America is generally defined as consisting of the entire continent of South America in addition to Mexico, Central America, and the islands of the Caribbean. Boasting a combined annual gross domestic product (GDP) in excess of 5.8 trillion USD, the region is positioned to thrive in the post-COVID economic expansion.
Wall Street certainly is betting on faster economic growth, as the main U.S. stock market indices flirt with all-time highs. On Tuesday, though, an uptick in global COVID-19 cases dampened investor moods. The Dow Jones Industrial Average fell 256.33 points (-0.75%), the S&P 500 slipped 28.32 points (-0.68%), and the tech-oriented NASDAQ Composite declined 128.50 points (-0.92%).
In pre-market futures trading Wednesday, the three U.S. indices were little changed as investors awaited the next batch of first-quarter 2021 corporate earnings reports, which to date have been mostly strong.
Latin America brings the heat…
Solid economic fundamentals underpin Latin America as a whole: a rising (and educated) middle class, dynamic industrial capacity, technological innovation, increasing consumer purchasing power, and high-yielding investments.
Research firm S&P Global in late March raised its 2021 GDP growth forecast for the six largest Latin American economies to 4.9%, from 4.1% last quarter, because of better-than-expected performance in fourth-quarter 2020 and an improvement in global growth prospects. Major favorable factors include vaccine roll-outs and aggressive global stimulus (see chart).
Latin America has achieved at least a partial decoupling from developed countries, as its economies become more diversified and less reliant on commodities. After getting clobbered during the coronavirus pandemic, Latin equities present investors with compelling value.
The Latin-China nexus…
The Latin American economy is largely based on commodity exports. Around the world, the growing demand for raw materials has been a boon for Latin American commodities producers. The trend will continue as global economic growth picks up speed.
Latin America is a direct play on China’s voracious appetite for commodities. Infrastructure projects in China, the U.S., and elsewhere will further stoke demand for raw materials. That makes commodities producers with Latin exposure smart bets now.
In particular, China’s Belt and Road Initiative (BRI) extends through 60 partner countries, with planned construction that will consume huge amounts of raw materials for several years. With a price tag (so far) of 4 trillion USD, the BRI is intertwining Latin America with the world’s second-largest economy (see chart).
What’s more, China’s implementation of 5G infrastructure is proceeding apace among the country’s economic partners in Latin America, as part of Beijing’s strategy to set 5G standards around the world in China’s favor. (Click here for details on a 5G investment play.)
In large part because of China’s infrastructure build-out, we’re witnessing the early stages of a commodities “super-cycle” that will propel Latin economies forward. A super-cycle is a decades-long, above-trend, upward trajectory in a wide range of base material prices, stemming from a structural change in demand. The quickening economic recovery from the pandemic will fuel the commodities super-cycle and in turn Latin American growth.
That’s why it’s an opportune time to increase your exposure to commodities, not only for growth but also as a hedge against inflation. (Click here for our favorite commodities play.)
Rising demand for electricity…
Most Latin American companies are family-owned or privately held. Consequently, many benchmark indices don’t fully capture the economic vibrancy of the region.
A shrewd but often overlooked play on Latin America is to invest in electric utilities, which are proxies for the increasing activity of privately held companies in the region. The World Bank forecasts that Latin America’s power consumption will more than double between now and 2030.
Because they provide essential services, utilities also add stability to any portfolio. Tomorrow’s high-dividend-paying utilities will be the ones that capitalize on today’s high-growth opportunities in Latin America.
Our in-house expert on utilities, Robert Rapier, has amassed a stellar track record as chief investment strategist of Utility Forecaster. A wizard at generating high income for his followers, Robert now runs a new trading service: Rapier’s Income Accelerator.
Rapier’s Income Accelerator provides trades that are income machines, in up or down markets. Robert’s investment methodology churns out cash on demand, without touching risky assets that can demolish your nest egg. Click here for details.