Forestry Investment Blog

Given the strong prospects for economic and corporate earnings growth the Latin American equity market continues to offer good investment value even though the region is not longer at bargin basement levels.

According to Dean Newman the head of emerging market equities at Invesco Perpetual, Brazil and Columbia off the most stable economic and political frameworks.

The hugely improved security situation which has taken place during President Uribe’s term of office has been the catalyst of change for Columbia.

“I expect that improved situation to be maintained under his successor. One concrete result is that the oil and gas industry has a safer environment for exploration and production. Oil companies that were reluctant to get involved in Colombia, despite its excellent geology, are now much happier to do so. For us as investors, we see a much more welcoming approach,” added Newman.

Brazil has many strengths, it has a rich and wide variety of natural resources including gold, oil, timber, iron ore, hydro-electric power and nearly every type of agricultural product. In addition Brazil is the most populous country in Latin America, with a population estimated at 197 million in 2010.

‘The key to the realisation of its potential, especially over the last 10 to 15 years, has been a massive improvement in economic and political stability. As recently as the early 1990s, Brazil was in the grip of hyperinflation. That meant consumers and businesses were completely unable to plan ahead, not knowing what the value of the currency would be in a few hours, let alone several years,’ said Newman.

But as inflation has tumbled, so have interest rates. ‘For companies, more stable economic conditions have meant the equity and bond markets have opened up as a source of finance. For households, credit has become cheaper and more easily available. All this has been helped by the fact that Brazil’s banks have been cautious in their lending and are financially sound,’ he added.

Newman believes that while there is a risk of higher inflation, if it can be contained to a range of 4% to 8% with interest rates at &% to 12% then Brazil’s transition to a stable, low interest rate, low inflation economy will be cemented.

In a recent study by Reinhart and Rogoff public sector debt in all the major Latin American economies was shown to be below the 90% ‘tipping point’ at which economic growth prospects are hit.

Chile in particular is cited by Newman as one example of public sector fiscal responsibiliby. ‘Notably, revenues from the high copper price of recent years have been saved and the main copper company is state owned, strengthening the government’s financial position. The government now has little net debt, only 9% of GDP,’ he said.

The outlook is robust. ‘In particular, their success in reducing government debt levels means they are in a much stronger position, in this respect, than many developed economies. After the strength of Latin American equity markets in the last year or so, valuations based on historic, actual earnings are no longer cheap. But, on the basis of expected earnings, valuations are still attractive compared to the developed world,’ said Newman.

‘We believe Latin American markets still offer good value given the prospects for stronger economic and corporate earnings growth than in the developed economies, coupled with an environment of greater economic stability,’ he added.

For more information on investing in Brazil please click here

This entry was posted on Tuesday, June 1st, 2010 at 11:10 AM and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.