Investors seeking exposure to Latin America should look at Brazil rather than Mexico in the current climate, according to Will Landers, manager of a suite of Latin American funds at BlackRock.
Landers, whose Latin America Fund has returned 108 per cent over the past five years relative to the sector’s 67 per cent, told What Investment that while Mexico is an interesting market, it is ‘priced for perfection, priced for everything to go right, and maybe it wont'.
He continued, 'There is a large part of the optimism around Mexico that relates to the benefit to the country of the US economy recovering. But to a very large extent, Mexico is competing with the US. A lot of US companies are moving their production back from China and towards Mexico, because the costs of labour in China have risen, but the problem – from an investment point of view – is that the costs of energy are likely to be much higher in Mexico than in the US, cancelling out the advantages accrued from lower labour costs.
'In reality, US states that border Mexico get the cheap energy and can get access to Mexican labour. There are advantages to investing in Mexican equities, but a lot of the reforms that need to happen, and might happen, have already been priced into equity valuations.’
In contrast to the positive market sentiments that have engulfed Mexico, Brazil has been somewhat out of favour.
The MSCI Brazil Index has fallen by 1.5 per cent over the past year, while in the same period the wider MSCI Global Emerging Market Index actually rose by more than 6 per cent.
Brazil accounts for 58 per cent of the total of the Latin American Index, and Landers' fund is 62 per cent invested in Brazil, compared with 28 per cent in Mexico.
‘Brazil’s valuations are attractive, and there are certain sectors that look particularly attractive,' he says. 'Only 12 per cent of Brazilian GDP is derived from exports, making it less reliant on world events, while it has a strong and growing middle class of its own.’
One sector in Brazil of which Landers is a particular fan is food production. He cited Brasil Foods (BRF:SA) as a particularly attractive stock in the current climate.
‘This company is involved in the production of poultry and food proteins. It is a way to invest in the fact that there is an emerging middle class that can afford to eat meat, but that middle class also exists in Brazil, so there isn’t the currency risk or reliance on overseas consumers.’
One country to which Landers' funds have no exposure is Argentina. ‘The current government appears to have a policy that whenever it sees a problem it nationalises it,' he explains. 'We don’t believe the inflation data from the country, and we have no plans to invest there at this time.’