With developed nations offering little or no growth prospects, savers should look to emerging markets and particularly Latin America. It is one of the world’s fastest growing regions with leading funds achieving over 600 per cent growth in the past decade.
Last year Latin America’s GDP grew by six per cent and this year is forecast to exceed four per cent. Inflation though remains high at six to seven per cent for several states.
The region’s economy is well balanced, rich in resources and with a growing middle class. Whilst the US credit rating was downgraded this year, Latin America has received more upgrades than any other region.
Most of the key Latin American states are net creditors, not debtor nations, which is rarely acknowledged in the West.
Both by population and economy, it is dominated by Brazil with 191 million, followed by Colombia (45.9m), Argentina (40.5m), Peru (29.1m), Venezuela (26.8m) and Chile (16.9m).
Brazil is now the 10th largest economy on the globe, securing ‘investment grade’ status in 1998. Its domestic investment has risen strongly over recent years, a trend which is set to continue with the forthcoming World Cup in 2014 and Olympics in 2016.
The country is in better shape than when the global recession hit in 2008. Today it has over US$30 bn in reserves and less than $150bn debt outstanding. Dividend yields are close to four per cent.
The best way to get a savings foothold is by tracking an index or through a collective via a single country or Latin American fund although there are a few general emerging market funds with a fair holding there.
The top performing investment trusts over 10 years, according to AIC research using Morningstar, are:
n BlackRock Latin American, up 551.4 per cent;
n JP Morgan Emerging Markets (23 per cent in Latin America), up 510.8 per cent;
n Templeton Emerging Markets (19 per cent in Latin America), up 509.6 per cent;
n Advance Developing Markets (22 per cent in Latin America), up 333.4 per cent.
For Latin America, the JP Morgan Brazil fund is the most recent single country investment trust to be launched. It started in April last year and is run from Brazil and New York. It is one of two investment trusts tipped by Martin Payne at Leeds stockbrokers Brewin Dolphin, who likes its focus on small and medium-sized companies, thereby offering savers good exposure to the country’s domestic growth. It has a competitive annual one per cent fee.
Some investment trusts have had a long history of targeting Latin America. Murray International, for instance, was founded in 1907 and now has £1.1bn assets with 11 per cent held in Brazil and six per cent in Mexico. It saw 227.5 per cent growth over the last decade.
BlackRock Latin American is invested 73 per cent in Brazil, 16 per cent Mexico and four per cent Chile together with other holdings in Argentina, Colombia, Panama and Peru. Will Landers, its manager, speaking to the Yorkshire Post from the US, said: “Brazil is relatively insulated from any slowdown in global growth as exports are responsible for only 10 per cent of its economy.”
He has concerns over Mexico in view of its heavy reliance on the US. In Peru, the fund is increasing exposure through its largest bank, Credit Corp. He dislikes Argentina largely because of the capital controls imposed and the hyper-inflation. He says the Chilean economy is progressing well but the country is over-dependent on copper and valuations are too expensive.
The fund was launched in 1990 and trades at a three per cent discount. It is Payne’s second tip for Latin America.
Among unit trusts and open-ended investment companies, there are some notable successes. According to Lipper research, over five years they include:
n Aberdeen Global Latin American Equity, up 98 per cent;
n Amundi Fds Equity Latin America, up 90.6 per cent;
n HSBC GIF Latin American Equity, up 85.2 per cent;
n Henderson Gartmore Latin American, up 79 per cent.
These are all well-established, starting in 1994 for the first two, 2006 and 2004 respectively.
If looking for income rather than capital growth, the Aberdeen Latin American Income fund looks well placed. Launched in August last year, it has a flexible approach, allowing its managers to switch capital between asset classes to gain the best points in the economic and business cycles.
South American economies are dominated by commodities and their stock markets reflect this, such as Petrobas and Vale on the Brazilian exchange. Yet Brazil has high employment and has been investing in large projects and infrastructure.
Apart from political instability – notably in Argentina and Chile – some feel any chill in China will impact adversely on Latin America. Private client stockbrokers Bestinvest recommend First State Latin America, which can be held as an ISA and SIPP for tax benefits.
The Share Centre said Latin valuations are “very attractive”, notably Brazil and Columbia. It tips Invesco Latin America, Martin Currie Latin American (whose manager used to be at Scottish Widows) and Threadneedle Latin American.
A dissenting voice comes from Jonathan Baker at brokers Charles Stanley. He says the Latin economy is “overheating” and that Brazil is stalling on a deeper reform agenda that is essential to both the country’s long-term growth and fiscal stability.
BNY (Bank of New York) Mellon Asset Management has two Dublin-domiciled funds which could be worth watching: Brazil Equity, which was launched in 2007, and Latin America Infrastructure, which started 14 months ago. The former is mainly in financials, energy, materials and utilities whilst the latter has almost 40 per cent in industrials with 70 per cent in Brazil and 11.4 per cent in Mexico.
An exchange traded fund (known as ETF) is a cheaper and alternative approach to a collective. It replicates a specific index and is traded like shares. HSBC offers three, all domiciled in Ireland but eligible for ISA and SIPP inclusion : MSCI Brazil, MSCI EM Latin America and MSCI Mexico Capped. They are denominated in US dollars and therefore the currency exchange needs to be taken into account.
It also has an ETF covering the S&P BRIC 40, which stands for Brazil, Russia, India and China but for anyone seeking exposure to Latin America, too much of their investment would be diluted on other global areas.