Michael Wilson considers the prospect of a second year of growth for Latin America.

There aren’t many things that professional investors manage to agree on these days. But they do tend to concur on one point – namely, that it’s generally a bad idea to hope that last year’s winners will be able to repeat their successes for a second year.

If the markets have spent the past 12 months loading themselves up to the gunwales with gold, oil or Japanese bonds, you can probably be sure that everyone who wants them has already bought them. Therefore, something completely different is more likely to turn out to be this year’s hot investment theme.

Well, that argument has a certain logical charm to it. Which is a bit of a dilemma for Latin American investors, because it really does seem as though the Latin world might indeed turn out to be one of the big historical exceptions in 2010.

Last year, the region’s stock markets notched up some of the biggest gains ever seen, at a time when the world’s more developed markets were struggling. And this year, many think they can do it again.

Reasons to be cheerful
First, let’s look at those historical gains. Argentina’s Merval stock index put on 115 per cent in 2009, nearly 110 per cent in sterling terms. Brazil’s Bovespa made 82 per cent, or around 70 per cent in sterling.

Mexico made 46 per cent (44 per cent in GBP), neatly doubling what you’d have got from the FTSE 100 in London. Even struggling Venezuela managed 57 per cent growth, which was worth 46 per cent in sterling terms.

In fact, viewed as a group, Latin American stock markets notched up bigger gains than Asia, excluding China of course. Overall, your investment returns from Latin America would have easily trebled what you’d have got from a portfolio in continental Europe.

Why? Well, for one thing there’s China. Many of the biggest countries in the region (Brazil, Argentina, Chile, Mexico, etc) make their easiest money by supplying Beijing with all the commodity products that it is so short of, such as copper, grain, gold, pork products and even soya.

When you consider that Chinese growth is forecast to top 9 per cent in 2010 (just like in 2009) and the fact that the Chinese yuan looks set to strengthen, making China’s raging thirst for imports even cheaper to quench, it would be rather a surprise if this huge tide of commodity exports across the Pacific were to slow down any time soon.

Then, of course, there’s oil. According to BP’s annual World Energy Outlook, Latin America’s oil wells hold 124 billion tonnes of the black stuff, or about 10 per cent of the world’s known stocks. And Brazil just keeps on discovering more and more of it. At a time when Iran, the world’s second-biggest producer, is looking politically shaky, the likelihood of a price hike for North America’s favourite addiction seems overwhelming. It’s all good news for the region.

Things are not exactly grim on the domestic front either. Brazil and Chile are both forecast to achieve economic growth of 3.5 to 4 per cent this year, and Mexico ought to manage 3 per cent growth if things go reasonably well in the US, its biggest export customer. That would be nearly three times as much growth as the euro zone, and about the same as non-Chinese Asia.

Consider that these Latin American countries have around 570 million citizens between them, and that those citizens are getting richer at a remarkable rate. Car producers in Brazil and Argentina are working flat out to satisfy demand. Food and energy producers are doing a roaring trade, financial services are in demand, and – inevitably – mobile phone sales are growing exponentially with every passing year. The whole region is positively buzzing.

Well, perhaps not the whole region. Mexico has been having a tougher time during the past couple of years, as its export markets in North America have dried up. Rising US unemployment has put pressure on the millions of Mexican expats who normally rely on the US jobs market for money to send home to their families. The cost of making tortillas, a staple food, has soared because America’s bio-fuel programme has pushed up the world price of maize. And the centre-right wing president Felipe Calderón has been having an increasingly hard time facing down left-wing opposition and an angry public.

Election fever
So, ironically, it is Hugo Chavez, the leftist president of oil-rich Venezuela, who has had to fight a mounting wave of opposition to his plans for more direct personal control of the nation’s industries.

September’s parliamentary elections will see Chavez’s United Socialist Party pitching hard against a united opposition platform, which is known to have support from the armed forces. Some commentators are even talking of the risk of a coup d’état. Unsurprisingly, most investment funds have scaled down their Venezuelan exposure quite a lot.

There’s no such caution in Brazil, though, where a crucial general and presidential election is due on 3 October. In theory, it ought to be a shoo-in for the left-wing Workers’ Party, which has dominated Brazilian politics for the past seven years under the hugely popular leadership of President Luiz Inácio Lula da Silva.

Lula’s team have presided over the most extraordinary economic leap the country has ever seen, and their support ought to be assured. But in practice it won’t be that simple. Lula isn’t eligible to stand for a further term in office, and his chosen successor, Mrs Dilma Rousseff, has been worrying the markets with some rather dirigiste talk that might create an opening for the opposition leader, José Serra. 

Still an inexpensive market
So how do the Latin American stock markets stack up as investment propositions? Attractively is the short answer – and, in some cases, especially so. We’ve already said that the positive economics are in place for the whole region. But Brazil, the region’s most liquid market, is also cheap by emerging market standards.

In January you could buy a typical portfolio of Brazilian stocks at an attractive price-to-earnings ratio (p/e) of only about 13, which was roughly the same as London. China, by comparison, would have cost you a p/e of 18. Argentina was at 16, Mexico was on 21, Chile was on 18, India was at 22, and even troubled South Africa was on 15.
So how do you get into the Latin American scene, assuming that you’re really sure you can cope with the higher risk level?

Well, the traditional way, for British investors, has been to buy something like BlackRock’s Latin American investment trust (BRLA), which invests directly in large Brazilian, Mexican and Argentinian companies – mostly in the mining, banking and infrastructure sectors. BRLA made a fantastic 113 per cent last year, rising from 300p to nearly 640p. Not bad considering that this profit was in sterling.

However, these days some new investors are attracted instead to exchange-traded funds like iShares’ MSCI Latin America ETF (LTAM), which is exempt from stamp duty and which can go into your ISA just as easily as an investment trust. This ETF includes all the big countries plus fringe markets like Peru, Colombia and Chile that may do exceptionally well. If you’re more firmly sold on Brazil, the iShares MSCI Brazil ETF (IBZL) is a single-country play that went from £20 to £37 in the same period.

So can these funds repeat the same amazing trick this year? Well, that’s the $64,000 question. But right now, it looks like a good bet.