MPH 2008
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Make your mind up: North or South America?
Ride the Mexican wave
FOR decades South America has lived in the shadow of its mighty northern cousin. The US had all the money, the industry and, until recently, the share price performance.
But in recent years the stock markets of Latin America have outperformed their powerful neighbour by a large margin. While US funds have returned an average of 35.4 per cent over three years, the best Latin American fund, from Invesco Perpetual, has returned 310 per cent.
The three other funds in the sector, from F&C, Scottish Widows and Threadneedle, have all produced returns of more than 230 per cent. Latin American funds also outperformed US funds over five years. How has this come about? Jason Hollands, of F&C, which has been investing in South America since the 19th century, says that the convergence factor has played a big part.
He says: “Mexico is an even more compelling convergence story than Eastern Europe. It has been a main beneficiary of outsourcing by American companies and, sitting alongside the US, it has a huge geographical advantage. It is a larger trading partner with the US than either the UK or Japan.
“It has come a long way, but with a population of 105 million and per capita income of only $6,500 (£3,651), there is scope for further growth.”
Jules Mort, manager of Threadneedle’s Latin American fund, says that everything is currently running in the continent’s favour. “Low global interest rates increase liquidity and this has helped to boost businesses. The region has also benefited from China’s voracious appetite for raw materials. Brazil and Chile are exporting iron ore, copper, gold and silver, while Mexico and Venezuela are selling oil in large quantities.”
On the domestic front, he says that countries such as Mexico and Brazil are enjoying the fruits of their earlier decision to curb inflation and protect their currencies by raising interest rates and are now bringing them down, thus boosting domestic demand.
He says: “We are reflecting this by purchasing more consumer stocks, such as Ambev, the beer company, and Lojas Renner, a department store group, though we continue to hold a lot of mining stocks, such as Antofagasta, the Chilean copper company, because the natural resources sector is still going strong.”
So what could spoil the party? One damper could be a big rise in US interest rates. This would force South American countries to do likewise to stay in step, thus killing off any consumer boom. The continent would also suffer badly if Chinese demand for raw materials were to falter. Another concern is political uncertainty. Mr Hollands says: “A number of elections in the region have seen a sharp leftward shift. Although investors seem to have taken this in their stride with regard to Bolivia and Peru, there are elections due in the two key markets of Mexico (in July) and Brazil (in October).”
Mr Mort shares the concerns of Mr Hollands but adds: “People were worried about the election of the left-wing President Lula, a former trade unionist, in Brazil, but he has proved quite good for business. Brazil and Mexico go into these elections with domestic economies stronger than they have ever had. Right now Brazil looks to be in better shape than Italy.”
Magnus Grimond:
Those against the tide are buoyant
THE US has been the odd man out in the stock market revival of the past three years. While most markets around the world have barely paused for breath, shares in the home of capitalism have lagged.
But the contrarian investor is often the one who makes money. Peter Kaye, manager of the Melchior North American Opportunities Fund, has made plenty for his investors. From launch in November 2004 to March 31, the fund is up 37 per cent against a rise of only 18 per cent in the mainstream S&P 500 index.
He says that the market has been held back by rising interest rates and worries that high commodity costs will feed into inflation. But the Federal Reserve, the US central bank, will be aware that there are few signs that rising commodity prices are creeping into the economy.
“Inflation fears look to be abating, so I think that the catalyst for the market will be the date on which rates top out — the end of the rate-raising cycle. At that moment, the Fed will raise a flag and say that’s it for the moment.”
He says that it almost did that last week, when the bank suggested that the risk of rising inflation is now almost balanced by the risk that consumer spending may slow.
John Hatherly, an independent investment consultant, agrees that the weakening US housing market could point to lower consumer spending. Even so, he says that it is not causing undue worry.
And even if consumers do pull in their horns, fund managers are still finding good companies to buy. Felix Wintle, who runs the Neptune
US Opportunities fund, which ranks neck-and-neck with the Melchior fund, says: “If you believe the globalisation story, then you have to believe that US companies are going to form a key part of that cycle. The US has the biggest and best companies in a range of sectors.”
Mr Kaye points out, too, that US companies have seldom been healthier, with high cash balances and strong earnings. Price-earnings ratios, a measure of stock market value, also look reasonable.
As ever, there are flies in this ointment. Gordon Grender, manager of the GAM North American Growth Fund, whose knowledge of the US market spans a generation, points out that US companies’ profit margins are very high. He suggests that the only way from here is down.
And Mr Wintle admits that one of his concerns is the dollar. With interest rates near their peak, the currency could be affected, which would be bad for investors in US shares.
In addition, “active” fund managers have traditionally struggled to outperform the US market consistently. An alternative is to buy a tracker fund, such as the Edinburgh US Tracker, which is an investment trust that replicates the performance of the S&P 500 index.
The verdict
Overview: Despite the risks, now looks like a good time to swimagainst the flow and buy US. Latin America still looks attractive but for only a small portion of investors’ cash.
Experts’ way in: GAM North American Growth has a good record. Justin Modray, of Bestinvest, the adviser, suggests Lincoln Emerging Markets for exposure to Latin America.
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