Investment decisions are always a balance between company performance and the wider economic landscape, but never more so than in Latin America, argues portfolio manager Will Landers.
Capital at risk: All financial investments involve an element of risk. Therefore, the value of your investment and any income from it will vary and your initial investment amount cannot be guaranteed.
Some regions are more prone to volatility than others. Latin America – comprising South America, Central America, Mexico and the Caribbean – is a case in point. Major political and corporate scandals are common, as are strikes that can bring labour to a standstill, while whole economies can veer out of control and back again with changing governments. It’s also vulnerable to wider political factors, for example the US administration’s attitude to tariffs and free trade.
Making investment decisions in this region requires a deep awareness of such sensitivities. When we look to making a new investment, our approach is typically bottom up – we look for individual companies that we believe will offer good investment prospects. We then assess the quality of the management, develop a view on the earnings it will make and whether that company is going to be able to deliver what we expect of it. Regular meetings with senior management – along with government officials – are an important component of our process.
While our belief in investment choices is paramount, it is increasingly important to understand the wider economic and political forces that can influence the market and affect the performance of our investments.
Awareness of sensitivities
The region’s sensitivity creates risks we must manage in the portfolio and so central bank policies and politics must also be factored in. To give an example, the impeachment of former Brazilian president Dilma Rousseff on charges of corruption in 2016 had an impact upon the whole region. The ‘hangover’ from this episode placed greater importance on all elections throughout 2017 and 2018 and led us to reconsider how to integrate our views on the macro issues into our decision-making process and as a result, increased the weight we give these matters.
Likewise, trade tensions have increased around the world as a result of US policies and this has serious consequences for the region. Mexico is under threat of tariffs and, along with Canada, awaits the outcome of the North American Free Trade Agreement (NAFTA) negotiations.
Elsewhere in the region, we are seeing governments take greater responsibility for sustainable economic policies. Brazil is leading by example by curbing spending to take control of the budget deficit. It has also addressed weaknesses in the labour system by introducing business-friendly policies that make it easier to recruit workers and limit the cost of providing benefits.
We have a strong understanding of the Latin American market, with two senior research analysts based in São Paolo, Brazil, who keep their fingers on the pulse. They work closely with other team members in New York and we are part of a broader global emerging market team.
Being part of the world’s largest asset manager offers us a great deal of resource to support – and challenge – our thinking about investment decisions. Monthly meetings with our risk and quantitative analysis group and senior economists examine current trends, consider new opportunities and debate how we might respond to changes in the future.
This collaborative approach to risk management provides additional perspective on the economic and political risks in the region. This, along with our deep analysis of the markets, our ongoing narrative with colleagues about each economy and local knowledge from boots on the ground, benefits investors seeking to access this exciting and highly dynamic market.
We know that investors are looking for alternatives beyond developed economies. Latin America, with its predominantly young demographic and the potential for domestic growth, remains an exciting and highly dynamic market – just so long as we always keep an eye on the bigger picture.
Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore the value of these investments may be unpredictable and subject to greater variation.
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Trust specific risks
Overseas investment will be affected by movements in currency exchange rates. Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation. Investment strategies, such as borrowing, used by the Company can result in even larger losses suffered when the value of the underlying investments fall.
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