BlackRock, Cenkos Securities Andrew Worne highlights reasons to invest in Latin America


Following the release of BlackRock Latin American Investment Trust plc (LON:BRLA) half yearly financial results announcement for period ended 30th June 2020, Andrew Worne from Cenkos Securities, on reading the Interim report, said he was drawn to the insight from the managers, Sam Vecht and Ed Kuczma regarding the reasons to consider investing in Latin America:


The government-mandated temporary shutdown of businesses in practically every jurisdiction around the world has created an expected degree of havoc in activity. In pragmatic terms, we need to focus on the impacts of the path chosen (including pre-sent policies and future impacts). The focus now needs to be on identifying the recovery’s chance of continuation and any long-term trauma for the economies.

Our constructive outlook for Latin equities is based on three pillars:

i.               corporate operating leverage;

ii.              a global reflation trade underpinned by historic amounts of global stimulus; and

iii.             a prolonged period of low or negative real interest rates to help governments de-leverage.

Within this context, we retain an overweight portfolio exposure to Brazil and see positives coming from the strong tailwind of lower interest and the multiplier effect this can have on consumption and investment. Valuations were perceived as very asymmetric in March and April, but not anymore. At the same time access to debt and equity markets has been fluid during the pandemic and we are seeing companies emerge with stronger balance sheets. Additionally, we see industries becoming increasingly consolidated as the pandemic has forced businesses that were already facing challenges before the crisis to scale back, creating opportunities for the industry leading companies that we invest in to gain market share. In this regard we are optimistic on the ability for corporates to earn attractive returns relative to the prevailing cost of capital over the longer term.

Furthermore, Latin America as a region is a key supplier of raw materials to China and the majority of the economic data published in August confirms that Chinese expansion continues apace, led by manufacturing and construction. This should support higher sustainability of commodity prices which in turn provides a favourable outlook for Latin American mining companies and related sectors. Additionally, after strong depreciation of Latin American currencies in the first half of this year, we see a bias towards currency appreciation over our investment horizon as local currencies look cheap in regard to developments related to terms of trade and reduction of current account deficits across the region. Monetary policy signals and the extent of fiscal stimulus in the United States suggest that the persistent strength of the US Dollar over Latin American currencies seen in the first half of this year has ability to unwind, providing a tailwind for total return for Latin American equities purchased in hard currency. 

Finally, as Latin American equities have underperformed their Emerging Market peers since relative performance peaked in January this year, Latin American equity markets currently trade at a discount relative to their 10-year historical averages and their Emerging Market peers (based on consensus 12-month forward price-to-book value multiples). While the region still faces challenges in terms of the pace and shape of economic recovery, we are confident that long term equity investors can benefit from having exposure to the region for the reasons set out above.

ED KUCZMA and SAM VECHT BlackRock Investment Management (UK) Limited 10 September 2020

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