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The current turmoil roiling the global financial markets has hit emerging markets hardest of all.
Overall valuations now sit at levels not seen since the Asian Financial Crisis of 1997-1998. For example, the Hang Seng Index in Hong Kong traded below book value last week. That is the first time that’s happened since 1998!
That is why as a contrarian value investor I’m so intrigued right now with those markets.
Not long ago I gave my thoughts on various emerging regions of the globe. Now, I want to take a closer at Latin American markets.
Latin American Recession
Latin America, as a whole, will be in a recession for the second consecutive year in 2016. The International Monetary Fund forecasts an economic contraction this year of 0.3%.
That is the first time that’s happened since the recession in 1982 and 1983. That was the start of the region’s so-called “lost decade.”
But the overall figure from the IMF masks the truth. Latin America really is a tale of two groups of countries.
The first group is the socialist disaster countries – Venezuela and Brazil. With the political upheaval in Venezuela in 2016, its economy is forecast to shrink by about 6%.
And then we come to the disaster that is Brazil President Dilma Rousseff. Her “progressive” policies have pushed Latin America’s largest economy into the worst recession seen since the Great Depression. The IMF believes Brazil’s economy will contract by 3.5% this year.
Needless to say, both countries are to be avoided by investors. The time to jump back into Brazil will be a few months before her term runs out in 2018. That’s if she isn’t impeached before then.
Latin American Bright Spots
Now to the good news.
Chile, Colombia and Peru are forecast to enjoy economic growth this year of between 2.5% and 3.5%. These three nations, together with Mexico, form the Pacific Alliance trading block.
These countries are all exposed to the collapse in commodity markets. But they are holding up thanks to pro-business reforms previously instituted.
The contrast between the Pacific Alliance and others in the region is sharp. Between 2010 and 2015 these countries had 3.6% lower inflation than the average for Latin America. They also grew gross domestic product at a 1.5% higher rate and invested 2.5% more GDP.
Another difference is that the Pacific Alliance nations have fast-growing domestic pension fund industries that continue to amass money for investment.
Our neighbor to the south, Mexico, is another good story. It is expected to show 2.7% GDP growth in 2016. Its ties to the U.S. economy are a boost, as are labor costs rivaling China. At work too are genuine reforms undertaken by Mexico’s leader, President Enrique Peña Nieto. The measures allowed Mexico to sell a 10-year sovereign bond this month that met with high demand.
Mexico’s central bank president, Agustin Carstens, is also interesting. He is calling for emerging-market central banks like his to boost their domestic economies by fighting the loss of capital from international investors. Carstens suggested those central banks exchange high-risk, long-dated assets held by investors for less risky, shorter-dated central bank and government liabilities.
Carstens’ proposal is a unique solution to stop capital outflows. If it works, the central banks can later sell the assets they purchased at a profit as capital markets return to a “risk-on” mode.
There is also the turnaround story being engineered by Argentina’s new president, Mauricio Macri. He is a believer in free markets – quite a refreshing change after decades of socialist rule. Already Macri has overseen a successful devaluation of the Argentine peso. He is also re-engaging with the world’s financial system and has freed up Argentine farmers to sell their abundant crops in the marketplace.
Latin American Stocks
All five countries I just spoke about are well worth a look by investors.
But as I said in my emerging markets overview, finding a good way to invest in these countries for U.S.-based investors is tough. ETFs based on indexes are a joke, since only a small sampling of stocks are included.
And in the case of Latin America, the few mutual funds that cover the region also stink. The funds have the large-cap stocks, many of which are in Brazil, and that’s it.
But there are some high-quality Latin American stocks that are traded on U.S. exchanges. Here are a few suggestions:
In Argentina, the banks look OK. These include: Banco Macro (NYSE: BMA), BBVA Banco Frances (NYSE: BFR) and Grupo Financiero Galicia (NASDAQ: GGAL).
In Chile, one can consider beverage company Compania Cervecerias Unidas (NYSE: CCU) and retailer Cencosud (NYSE: CNCO).
In Colombia, financial services company Grupo Aval Acciones y Valores (NYSE: AVAL) might be worth a look.
In Peru, another financial services firm – Credicorp (NYSE: BAP) – is interesting. One word of caution regarding Peru. It may be downgraded from an emerging to a frontier market this year.
Finally, in Mexico, I like beverage seller Fomentos (NYSE: FMX). The following airport stocks are also worth considering: Grupo Aeroportuario del Centro Norte (NASDAQ: OMAB), Grupo Aeroportuario del Pacifico (NYSE: PAC) and Grupo Aeroportuario del Sureste (NYSE: ASR).
How to Sleep Easy at Night
Is the economy keeping you up at night? Do you worry there’s another crash just around the corner? If so, you can stop worrying right now. All it takes is a few minutes.