Where in the world should you invest? Commodities, tech, and fast growth define this region

This is the second part of our 'Where in the world should you invest?' series, focusing on investment regions beyond Australian shores. 

For each region in question, we reached out to a fund manager with expertise in the region to answer the same five questions, listed below. 

• What are the main characteristics of the investment region?
• Why do you like the region as an investment destination?
• What are the major risks to the region?
• What is the one thing that potential investors need to know before investing?
• What is one stock in your portfolio that best represents the region?

Today we're joined by Dr Joseph Lai, from Ox Capital, to discuss Latin America (LATAM) as an investment destination. 

The previous investment region discussed was Asia, and you can assess that wire here: 

• Where in the world should you invest? This region represents 55% of globally listed companies 

Latin America (LATAM)

Key stats and food for thought

• LATAM is home to 8% of the world's population - median population age of 31
• Home to 12% of the world's middle-class
• Attracts 9% of global foreign direct investment
• Renowned for agricultural products like coffee and sugar, and natural resources such as copper, iron and petroleum.
  
• One of the hottest areas for growth in LATAM is fintech - venture capital investment in LATAM fintech start-ups growing 690% over the past 5 years (Mauve Group)

Managed Fund

Ox Capital Dynamic Emerging Markets Fund

Global Shares

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What are the main characteristics of the investment region?

The LATAM region is the commodity powerhouse of the world. It ranks in top positions globally for soybeans, corn and copper exports. The region is endowed with 60% of the world’s lithium reserve and has a significant silver reserve.

Country-wise, Brazil will benefit as the Chinese demand for agricultural products continues to grow. Chile and Peru have commodities that are critical for energy transition. Mexico is especially well positioned as the near-shoring champion to bring manufacturing closer to the US.

The region is more economically advanced than generally perceived. Income per capita is US$16K in Chile, $11K in Argentina, and $8-10K for Mexico and Brazil. One may argue that the governments in the region are more fiscally responsible than that of developed markets. For example, during COVID, they did not significantly pile up public debt to pay for stimulus and the central banks in the region stepped in to fight inflation earlier. Inflation is now under control.

The region is well positioned in the current world order. Most countries within LatAm happily tread the middle ground in the US-China rivalry, enjoying investments and favourable trade policies.

Why do you like the region as an investment destination?

Diversification, amazing growth opportunities and extremely attractive valuations.

Diversification: Between 2001 and 2010, LatAm equities returned 21% a year in US dollar terms vs. 4% a year for the MSCI World index. During this time, LatAm equities outperformed MSCI World index in 9 out of 10 years, coinciding with a strong commodity cycle.

Growth opportunities: The region is a significant economic bloc with population of over 650 million with a fast-growing middle class that fuels huge and growing consumption demand. The middle-class numbers over 300 million and this is set to climb to over 420 million by 2040.

Attractive valuation: Current equity valuations are at a 40% discount to their historical range, and the region is entering an easing cycle. A case in point is Brazil. The interest rate reached as high as 13.75%. Inflation is now below 4%. Valuation is attractive and will revert back to a higher level when interest rates inevitably gets cut. There are plenty of exciting trends: e-commerce, fast food restaurants, modern healthcare, catch up in IT/enterprise software spend.

We are finding lots of strong champion companies, with long growth runway on attractive valuations.

These companies have demonstrated ability to execute, and they managed to grow in recent years despite crushingly high domestic interest rate. As financial condition loosens, they stand to benefit disproportionately.

What are the major risks to the region?

A rising USD is traditionally negative for LatAm equities. But there is a high likelihood of peaking USD with inflationary pressure easing in the US. Another risk is a major global economic slowdown. While one cannot rule this out, the US has been able to calm inflationary pressure down without a significant rise in unemployment and the Chinese authority’s desire to relax policies reduce this risk.

What is the one thing that potential investors need to know before investing?

The index weight of the region is only 1% of the world index when it has 12% of the middle-class population in the world. The region also attracts 9% of global foreign direct investments. The region is strikingly under-indexed in the equity market.

What is one stock in your portfolio that best represents the region?

BTG Pactual Investment Bank (BVMF: BPAC11) is the number one investment bank in the region. Jokingly, its nickname in the region is 'Better than Goldman'. This investment bank has been battle tested in tough macro environments with skyrocketing high interest rates of 13.75%! Despite the tough environment and weak investment banking/capital markets, BTG managed to grow revenues by 24% and net profits by 28% in 2022. ROAE (return on average equity) was north of 20%.

Further, the quality of BTG’s franchise will become stronger as it builds out its wealth management platform which is a much less volatile business compared to traditional investment banking. Even in the background of high interest rates, which are typically negative for financial institutions, BTG grew its asset and wealth management platforms by 31% and 66% respectively. It even managed to grow its sales and trading division by 24%, demonstrating the effectiveness of its customer-centric approach.

It is an industry leader by virtue of serving its customers better and it has a long growth runway. As the leading investment bank in the region, BTG will benefit greatly from deepening of financial services. The wealth management industry in Brazil is still heavily dominated by the major traditional banks which are less equipped to satisfy the needs of the ever more discerning customers.

Its valuation is attractive, on 11x 2023 price earnings multiples. It will see its earnings pick up strongly as interest rates inevitably come down.

How to invest in LATAM (some options)

• Ox Capital Dynamic Emerging Markets Fund
  

Managed Fund

Ox Capital Dynamic Emerging Markets Fund

Global Shares

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• abrdn Latin America Income Fund
• Blackrock Latin America Investment Trust PLC

If we have missed any of the ways that you invest in this region - even if you own direct shares, or you would like to share an experience about investing in LATAM, please comment below.