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Scott Piper, Portfolio Manager for the Milltrust Latin America (UCITS) Fund, and Lead Portfolio Manager – Latin American Equities at Itaú Asset Management, shares his outlook for the Latam markets and the key reasons to be invested in Latin America:

Key growth drivers.

  • Brazil: falling inflation creates room for falling interest rates, which are positive for equities. There is also a more competitive currency, which is already improving current account deficit, making the country less vulnerable to external shocks. From a political stand point we now see more stability with the new government and there could be further improvement once the impeachment process is finally over, in August. As for economic activity, we expect a significant improvement in growth in 2017. We already see leading indicators, such as business confidence, improving, and others, such as consumer confidence, giving signs of a bottoming.
  • Mexico: Very positive outlook for consumption: low inflation, strong labor market, rising income and mini-credit boom. We see an improving outlook for manufacturing on weaker currency and growing exports to the U.S. We also expect foreign direct investments to increase as a positive side effect of the energy and electricity reforms.
  • Chile: We expect less political interference in the economy, which is a positive driver since the side effects of the last reforms, particularly the tax reform, were negative, hurting economic activity. Other positive drivers are the weaker, more competitive currency and falling interest rates.
  • Peru: Greater political stability with a market friendly government just being elected. We expect rising investments and more government spending, particularly in infrastructure.
  • Colombia: Rising infrastructure spending, falling interest rates going forward, improving fiscal balance as oil prices remain stable, positive effects of the tax reform, and also the promising outcome of the peace negotiations.

Key risk factors.

  • Brazil: Despite recent improvement, there are still concerns with the political environment. We are also concerned with the difficulties that the new government will face in order to approve structural reforms, necessary to address the fiscal account problems. Commodity prices are another source of concern for Brazil. The issues above are very important to determine the macro outlook and we have been managing the country weight accordingly.
  • Mexico: a slowdown in the US economy is a major source of concern, as it would hurt Mexican exports. The electoral cycle in the US could also be a source of downside risk to Mexican exports.

Oil is very important to the Mexican economy, in terms of tax revenues and investments, especially after the approval of the energy reform. Therefore, the price level of this commodity is an important figure for the country’s outlook.

Also, any slowdown in consumption would be very relevant to equities. Not only because consumption has been the main driver of economic growth, but also because consumer stocks trade at very high multiples. De-rating, therefore, could be significant. We have been underweight the sector.

A source of concern for the mid-term would be the presidential elections in Mexico in 2018. The election is decided in only one round, therefore, a candidate with 35% of votes could win and a left- wing politician, Manuel Lopez Obrador, is a potential strong candidate.

  • Chile: Copper represents 10% of GDP, therefore, copper price is always a source of concern. There is also the political risk of the government adopting a more “leftist” approach.

We remind investors that the Chilean market went through a de-rating process, in terms of multiples, because of the populist set of reforms that the current government approved, particularly the tax reform. We are underweight commodity and consumer stocks, and have exposure in the Chilean market through Utility companies, which have a more resilient profile.

  • Peru: The most relevant source of concern would be a collapse in commodity prices. We are not optimistic with commodities in general, but we do not believe there is going to be a collapse in prices. As Peru is a low cost commodity producer, we do see commodity prices hurting the economic recovery process. We have an overweight exposure to banks in Peru as a country proxy.
  • Colombia: Colombia is very dependent on oil for both tax revenues and exports purposes. Oil prices are therefore a source of concern. A potential failure to approve the tax reform and reach a peace agreement would also be another source of concern. We have exposure to Colombia through the Cement companies. They would benefit the most from the infrastructure program (“4G”).

Forecasted return for each investment over the next 12 months (in USD). 

The target return, on average, of our portfolio is roughly 30%

Potential downside over the next 12 months (in USD).

The potential downside of the portfolio is close to 10%

June 2016