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Latin America is a region of the American continent where Spanish is spoken mostly. It is composed of 20 countries that together have a total area of around 22,222,000 km2. Latin America boasts the largest amount of food, oil, energy and mineral resources on the planet.
The combined economy of Latin America is the third largest in the world, and in recent years, its countries have stood out for the accelerated development and economic growth.
In general, the economies of most Latin countries have been improving. There are clearly notable exceptions, such as Venezuela, Argentina or Nicaragua, countries where monetary policies have done little or nothing to compete in the Latin American and world markets.
The investment landscape caters to Latin American economies that have recently developed high income levels, such as Chile and Uruguay. The investment landscape also looks positive in Colombia due to a peace agreement ending the country's civil war and Peru with its rapidly growing economy. The potential of Latin America is promising, and each year, the outlook for countries such as Mexico, Colombia, Chile, and Peru improves significantly.
Use ETFs to target Latin American investment
The largest ETFs in the Latin American market are in Brazil (EWZ), Mexico (EWW), Chile (ECH), Peru (EPU), and Colombia (GXG) respectively. The ETFs in the region are mostly managed by BlackRock with the exception of Colombia and Argentina, where the largest funds are managed by Global X. In Latin America, there is also the iShares Latin American 40 ETF (ILF) which follows the Brazilian market because it is mostly made up of Brazilian companies. All these funds have been under-performing in the last year. The main reason for the underperformance is the funds have heavy exposure to the Brazilian stock market, which experienced a fall of more than 10% in the first half of the year.
There are several factors that make the current panorama of the Latin American markets more promising than for the first half of the year:
- The recovery of the Brazilian market as the presidential elections have concluded.
- The increase in the price of oil. Latin American funds have very big positions in oil companies such as Petrobras (PBR), Vale (VALE) and Ecopetrol (EC).
- The stabilization of mineral prices and their export, since, in Peru and Chile, the funds are mostly made up of mining giants.
In comparison with the US market, the Latin American market has not performed well. The United States has benefited from President Trump's protectionist policies. The new tariffs are increasingly strengthening the S&P 500 (SPY).
"MILA" four countries, one market...
The MILA is the Latin American integrated market that brings together the stock exchanges and deposits of the 4 most efficient and successful economies in Latin America, which are Chile, Mexico, Colombia, and Peru. The 4 countries represent almost 40% of the GDP of all Latin America, and together, they aggregate more than 700 companies with a market cap of around $927 billion.
The 4 member countries of MILA are investment-grade economies and are attractive for allocating foreign investments in their capital markets.
FDI (foreign direct investment)
Latin America is becoming a popular destination for foreign capital around the world. The main source of FDI for Latin America is the European Union (42%), whereas the United States only accounts for 28% of FDI. The USA has the greater influence in the region, but low investment levels.
In 2017, there was a surprise increase of China's investment in Brazil, as the Chinese government acquired numerous assets in the utility/electricity sector. When China makes an investment in Brazil, it doesn't encounter the same CFIUS standards of buying a minority/majority share of an American-based firm. Brazil has the largest oil and mineral reserves in South America, and China is securing trade partnerships on the continent to integrate in a globalized market. Panama and Brazil are in the sights of the Asian giant.
The sectors where investment is concentrated are natural resources, manufacturing, and services. The strong global trend of the de-carbonization of the economy and the exploitation capacity has increased in the last decade. This will induce major changes by the end of the year, especially in the natural resources sector.
In recent years, FDI has been trending down. Since 2014, the price of export commodities has declined greatly and extractive industries such as oil have gone through periods of strong recession, especially in Brazil. Brazil is the largest economy in the region measured by GDP. The trends have been improving since 2017 attributed to the recovery of GDP growth (1.4%), the rise in the price of oil, and the stabilization of the price of metals.
Argentina, once the third biggest economy, is experiencing a monetary crisis
Argentina is one of the largest economies in South America, and it has gone through several crises. The central bank of Argentina has been known to implement protectionist and risky monetary policy.
The recently elected president Macri arrived ran on a political platform to get the country out of recession. The country is seeking IMF aid of $58 billion over the coming years.
The most recent crisis has pushed inflation to very high levels, and the central bank countered this by raising interest rates to 60% in an effort to devalue the Argentina Peso. The economy is contracting in the mid to high single digits.
The crisis of recent weeks in Argentina has worsened the investment outlook in the country. The currency has devalued by a 100% in 2018 and has settled around $37 ARS. The inflation expectations are increasing to a 30% annualized rate. Capital is starting to flow out of the country as investors take a risk-off approach. The country is embroiled in a recession and probably will not get out of it in the short term. The investment environment does not look attractive in the near term.
Chile and Peru are leaders in the extractive industry
- Chile is the best country for investment in Latin America
- The Chilean economy growth is 3 times bigger than other OECD countries
- Chile is one of the two countries in Latin America that are categorized by the World Bank as having high-incomes
- The country has political stability and a true democracy
Chile is positioned as the best country in Latin America to invest because the Chilean economy outperforms its Latin American neighbors. This stands out because, when compared to OECD countries, its growth is 3 times bigger. It is also characterized by the World Bank as one of only two Latin countries with high incomes (the other being Uruguay). The country has a favorable regime for investment and democratic stability that almost no country in the region enjoys.
Chile is the country with the highest GDP per capita in the region and has the largest mining reserves on the planet. Worldwide, it is the largest producer of copper, rhenium, nitrates, lithium and iodine. A nationalized firm called "Sociedad Química y Minera de Chile" (SQM) is the primary extractor of commodities. The firm has large extraction operations established in Atacama Desert and other mountainous regions of Chile. The firm recently made news for securing a partnership with Tesla (TSLA) to provide lithium at a fixed price for the increasing demands in Tesla's Gigafactory. Mining in Chile contributes more than 10% of the national GDP, and the industry represents 33% of the FDI. Mining and extraction will drive GDP for years to come as the country contains large copper and lithium reserves which are primary input material for the high growth electric vehicle and battery storage markets.
It has a favorable tax environment that reduces double taxation on investments.
Chile was the first country in the region to open up to foreign investment. It has 64 free trade agreements, which is the largest number in Latin America.
When I analyze the Latin American investment environment, Peru appears to be the second best. It has one of the highest GDP growth in Latin America, and its economy has tripled in size over the last decade. The country has the lowest inflation rates in the entire region and a very diversified stock market compared to its closest peer, Colombia.
The country is experiencing political instability. The last president Pedro Pablo Kuczynski resigned in disgrace amid corruption charges. There are still traces of Fujimori's corruption problems within the government, and the trials are ongoing.
Peru has one of the best credit ratings in South America (BBB+). The country has never defaulted, and the market is very appealing to international investors due to the good performance. The mineral resources in Peru attract a lot of Canadian and American investors.
Mining projects in Peru have been important for the development of the economy. They currently represent almost 60% of the country's exports, and the industry contributes more than 15% to GDP. 49 mining projects are planned in Peru, amounting to an investment quantity of around $58 billion. Peru is the second largest producer of silver and copper and exports its products to China (14.9%), Switzerland (18.5%) and the United States (11.6%).
Colombian investment landscape
Colombia is in the OECD, in NATO, and now without war. Colombia has been in the Top 3 of FDI in Latin America. In the last year of the Santos government, Colombia achieved several milestones for the country's economic and social development. The first of these is the end of the war with the FARC guerrillas, which greatly increased the confidence of foreign investors in the country. In June 2018, Colombia joined the OECD which is known of being a group of affluent countries. The membership was approved by the organization after several years analyzing the application and became the second Latin American country to enter the OECD. In the same month, the country also joined NATO. Colombia joined as a "Global Partner" and became the first Latin American country to be part of this organization.
The new right-wing government of President Iván Duque aims to allow further expansion of the country in economic and diplomatic terms. He announced new tax rebates to companies and is attractive from an international perspective for Colombia.
There's an opportunity in Colombia. I consider it the third best country to invest in Latin America. Despite not having a very diversified market, Colombia has a financial sector with outstanding performance. It has the highest growth rates with respect to other industries. The investment environment in Colombia has a good outlook for the coming years.
The three best investments in Latin America are Chile, Peru, and Colombia. The region is the third largest economy in the world and is experiencing an era of rapid economic development and political stability. The risks are prevalent; however, there is investment opportunity that gives these countries an above-market return potential.
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.