South America: Beyond Commodities

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Includes: ARGT, GML
by: Evans Osemwegie

Summary

South America is going through significant challenges and political upheavals.

We are now at the bottom of the market for most South American nations.

We should begin to see significant growth in 2016-2017.

2015 and 2016 have seen great upheavals in South America. We have seen political changes in Venezuela, Argentina and Brazil.

As I watch all of the uproar going on, I cannot help but wonder if this may be the perfect time to buy into South America.

In my opinion, we have hit the bottom in South America and this market is due for a turnaround. What has been lost in all of the negative headlines about South America is that this is a continent with nearly 390 million people with the internal demand for products and services growing all of the time.

The mistake many people make when researching investments in South America is to equate its economic growth with the commodities prices, this is incorrect as the continent is far more developed and advanced to simply be seen as a commodities play.

It has a highly educated and entrepreneurial population and with very attractive demographics, this is a region packed with investment potential especially now with this price.

What the region is facing at the moment is uncertainty. Venezuela is still going through a deep transition from which I believe it will emerge as a strong market based economy.

Brazil's challenge is different, there I believe we are seeing a generational shift. The corruption scandals demonstrates that there was a way of doing business in Brazil which was not a right fit for a modern economy.

This is not the first corruption scandal engulfing a South American government but the scale of public outrage and public uproar that has engulfed the administration is a signal to them that times are changing and the leadership will have to change along with the times.

Another nation that is on the cusp of greatness is Argentina. The policies of the previous administration almost bankrupted the nation but President Macri has begun to implement long awaited reforms, which include controlling fiscal spending and settling foreign debts.

However, in the short term, I expect some tough times ahead for Argentina because cutting fiscal spending is never easy and the risk is that if the cuts are too deep and too fast, it could drive Argentina into a depression. It is also risky politically as he does not really has a solid majority that can shield him when cuts begins to bite.

My concern is that he will have to cut deep and fast to convince international creditors that he is serious about balancing Argentina's books but it could come at the cost of his administration because the Argentinean electorate are notoriously impatient particularly as they have been pampered throughout the Kirchner administrations.

The long term for Argentina looks very bright but things will get worse before it gets better. We should not be surprised to see riots on the streets of Buenos Aires before the end of the year but if Macri remains resolute, protect the most vulnerable and builds a solid coalition of partners across the political spectrum then he will succeed.

I believe that he has what it takes and that going into 2017, Argentina will begin to flower. The current condition of South America as a whole is finely balanced but they will emerge stronger and better.

In my opinion, it is not the exporting but rather it is the internal demand that we need to watch. Metrics like domestic lending levels and home ownership, production and manufacturing data, increase in domestic spending and to a smaller extent, exports. These are the data that investors need to watch as a guide to when the economies are beginning to move higher.

It also helps that there are pockets of strength in the continent like Colombia, Peru, Uruguay and Chile that continue to grow despite the weak commodities prices.

The rest of the continent will benefit from the improving economic outlook of the larger nations, these includes nations like Bolivia and Ecuador.

My recommendation at the initial instance is to invest using ETFs for two reasons. Firstly, you have a more broad based performance growth and secondly, South America can be a difficult place for foreign investors especially Brazil because of their restrictions on foreign ownership. The SPDR S&P Emerging Latin America ETF (NYSEARCA:GML) is very broad and is underweight in the big Latin American equities and is focused more on smaller stocks.

This is a positive because it gives a pure play opportunity into economic growth within South America. I also like it because it is underweight on Argentina. As I said, investing in Argentina will be very successful in the long term but in my opinion, investing now is like trying to catch falling daggers.

I will wait until the end of 2016 and only then will we begin to see the Argentinean markets begin to settle and possibly grow. At that time, it will be good to add a pure play Argentinean ETF like Global X MSCI Argentina ARGT.

This ETF is not ideal but for exposure to the Argentinean market, it is the only one available. In addition, this article gives some ideas on how to access South America through tech companies as their use is exploding throughout the region.

In conclusion, South America is going through major upheavals but it is a continent that offers superior investment opportunities for savvy investors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.