Summary
- The MSCI Latin America Index has outperformed the MSCI Emerging Market Index cumulatively over the past 5 and 7 years, as well as over longer time periods, supported by its natural resource companies.
- The region is well positioned to exploit the opportunities created by the renewable energy revolution, with 54% of global lithium reserves concentrated there.
- Mexico is one of the beneficiaries of the China+1 strategy, in which manufacturers add additional production capacity outside of China.
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The Franklin Templeton Emerging Markets Equity team discusses the three themes of renewables, nearshoring, and consumption in Latin America from an investor's perspective.
Latin America is endowed with abundant natural resources, a growing population, and proximity to the vast American consumer market. The MSCI Latin America Index has outperformed the MSCI Emerging Market Index cumulatively over the past five and seven years, as well as over longer periods, supported by its natural resource companies. We have identified three themes that we believe will drive continued performance in the coming years:
- Delivering the Renewable Energy Revolution. The region is well-positioned to exploit the opportunities created by the renewable energy revolution, with 54% of the world's lithium reserves concentrated there. Latin America is also the largest producer of copper and iron ore.
- Nearshore and increased trade opportunities in the United States. Mexico is one of the beneficiaries of the China+1 strategy, in which manufacturers add additional production capacity outside of China. It is also eligible for the United States-Mexico Canada Agreement (USMCA) and the U.S. Inflation Reduction Act (IRA).
- Consumption. The growing demand for commodities globally has stimulated exports and created a ripple effect in the region, expanding the middle class while also stimulating financial deepening and increased demand for consumer goods.
The Investment Opportunity Latin America is home to 650 million people spread across 20 countries. What sets the region apart from other emerging markets is its access to resources.
The region produces nearly 40% of the global copper supply3 and is home to four of the world's largest lithium reserves, with Chile accounting for half of the total reserves.4
The region is also a major exporter of energy and agricultural commodities. From an investor's perspective, the region offers access to some of the world's leading resource companies, as well as access to those benefiting from strong domestic demand.
These include iron ore producer Vale (VALLE), oil explorer Petrobras (PBR), and copper miner Grupo Mexico (OTCPK:GMBXF) (via Southern Copper (SCCO)). Companies exposed to domestic demand include banks Grupo Financiero Banorte (OTCQX:GBOOY), Itaú Unibanco (ITUB), as well as consumer companies including Fomento Económico Mexicano (FMX), Mexico's Kimberly-Clark (OTCPK:KCDMF), Mexico's Wal-Mart (OTCQX:WMMVY), and Ambev (ABEV).
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The region has historically traded below developed market valuations, but boasts higher ROE and corporate margins. These attractive fundamentals, combined with rising commodity prices and resilient domestic demand over the past two years, have boosted market performance.
Politics and policies
In this positive scenario, there were challenges, including rising interest rates and political tensions in Brazil, Argentina, and Peru. However, the successful transfer of power in the region's largest economy, Brazil, is a positive sign for governance, noting that the new government's political stance has shifted to the left.
Investors are willing to separate domestic political events from the economy, as evidenced by the stability of currencies, including the Brazilian real and the Mexican peso.
What are the risks?
All investments involve risk, including possible loss of principal. The value of investments may go down as well as up and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, specific industries or sectors, or general market conditions. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets, and exchange rate fluctuations and policies; investing in emerging markets involves greater risks related to the same factors. To the extent that a strategy focuses on certain countries, regions, industries, sectors, or types of investments from time to time, it may be subject to greater risks of adverse developments in those focus areas than a strategy that invests in a broad range of countries, regions, industries, sectors, or investments. Investing in the natural resources sector involves special risks, including a greater susceptibility to adverse economic and regulatory developments affecting the sector; the prices of these securities can be volatile, particularly in the short term. Any companies and/or case studies mentioned herein are used for illustrative purposes only; any investments may or may not be currently held in any FranklinTempleton recommended portfolio. The information provided does not constitute an individual investment recommendation or advice for any particular security, strategy or investment product and does not constitute an indication of the trading intent of any portfolio managed by Franklin Templeton.
1. Source: US Geological Survey.
2. Source: United Nations Population Survey.
3. Source: S&P Global.
4. Ibid.
Editor's note: The summary points in this article were chosen by Seeking Alpha editors.
Editor's Note: This article discusses one or more securities that are not traded on a major U.S. stock exchange. Please be aware of the risks associated with these securities.
This article was written by
Franklin Resources, Inc. (NYSE: BEN) is a global investment management organization operating as Franklin Templeton Investments. Franklin Templeton Investments provides global and domestic investment management solutions managed by its Franklin, Templeton, Mutual Series, Bissett, Fiduciary Trust, Darby, Balanced Equity Management and K2 investment teams. The San Mateo, California-based company has over 65 years of investment experience and over US$ 908 billion in assets under management as of May 31, 2014. For more information, call 1-800/DIAL BEN® or visit franklinresources.com.
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