Investment Opportunities In Latin America

The Franklin Templeton Emerging Markets Equity team discusses the three themes of renewables, nearshoring and consumption in Latin America from an investor perspective.

Latin America is endowed with abundant natural resources, a growing population, and proximity to the vast American consumer market. The MSCI Latin America Index has performed better than the MSCI Emerging Market Index cumulatively over the past five and seven years as well as over longer time periods, buoyed by its natural resource companies. We have identified three themes that we believe are likely to drive continued performance in the years ahead:

• Supplying the renewable energy revolution. The region is well placed to take advantage of the opportunities created by the renewable energy revolution with 54% of global lithium reserves¹ concentrated there. Latin America is also the leading producer of copper, and iron ore.
• Nearshoring and increased US trading opportunities. Mexico is a beneficiary of the China+1 strategy, where manufacturers add additional production capacity outside China. It can also benefit from the United States-Mexico Canada (USMCA) agreement and the US Inflation reduction Act (IRA).
• Consumption. Surging demand for commodities globally has boosted exports and created a trickle-down effect in the region, expanding the middle class while driving financial deepening and increasing demand for consumer goods.

The investment opportunity Latin America is home to 650 million² people spread across 20 countries. What distinguishes the region from other emerging markets is its access to resources.

The region produces almost 40% of global copper supply³ and is home to four of the world’s largest reserves of lithium, with Chile accounting for half of total reserves.⁴

The region is also a major energy and agricultural commodity exporter. From an investor perspective, the region offers access to some of the leading global resource companies as well as access to beneficiaries of the strength in domestic demand.

These include iron ore producer Vale (VALE), oil explorer Petrobras (PBR) and copper miner Grupo Mexico (OTCPK:GMBXF) (via Southern Copper (SCCO)). Companies with exposure to domestic demand include the banks Grupo Financiero Banorte (OTCQX:GBOOY), Itau Unibanco (ITUB), as well as consumer companies including Fomento Económico Mexicano (FMX), Kimberly-Clark de Mexico (OTCPK:KCDMF), Wal Mart de Mexico (OTCQX:WMMVY) and Ambev (ABEV).

Valuations

The region historically trades below developed market valuations but has higher corporate margins and return on equity. These attractive fundamentals, in combination with the rise in commodity prices and resilient domestic demand over the past two years, have driven market performance.

Politics and policies

Within this positive backdrop, there have been challenges including rising interest rates and political tension in Brazil, Argentina and Peru. Nevertheless, the successful transition of power in the region’s largest economy, Brazil, is a positive signal for governance, noting the political stance of the new government has turned to the left.

Investors have been willing to separate the internal political events from economics, as reflected in the stability of currencies including the Brazilian real and Mexican peso.

What are the risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector—prices of such securities can be volatile, particularly over the short term. Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by FranklinTempleton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

1. Source: US Geological Survey.

2. Source: UN Population Survey.

3. Source: S&P Global.

4. Ibid.

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