August 7, 2020

Wealth Matters: Latin America, the Land of Opportunity and Caution

What happened? Can it be that Latin America is now a solid investment, as the middle class in many of the countries increasingly becomes a driving force? Or is the region’s cycle of booms and busts set to repeat itself?

Anyone who invested broadly in the region’s main stock indexes has had a bad year. Brazil’s index is down 16 percent, Mexico’s is down 5 percent and Chile’s is down about 16 percent. These numbers are worse for international investors because all three countries’ currencies have fallen against the dollar.

Not surprisingly, investors have been pulling their money out. As of Dec. 2 they had taken $9.8 billion out of Latin America, according to fund flow data compiled by Morgan Stanley research. (Emerging markets in general have not fared well this year, with investors taking out $36.6 billion.)

But, at the same time, companies as diverse as Siemens, General Electric, Nissan and Halliburton have increased their operations in Brazil.

China is Brazil’s major trading partner, which would seem to augur well. But it is selling commodities like iron ore, which could suffer if China’s growth continued to slow.

Yet Brazil also has a growing consumer sector. Sergio Cabral, the governor of the state of Rio de Janeiro, told me that almost 40 million people in Brazil had entered the middle class in the last five years. (Gerardo Zamorano, a director at Brandes Investment Partners, put that number at 25 million to 30 million, which is still a striking number given that Brazil had almost no middle class when I was there.) And Governor Cabral said that demand for all types of consumer goods was far outstripping supply in his state.

“Prices are crazy,” he said on a visit to New York this week. “We need more hotels. We have a suite problem — we have demand but we need more supply.”

That is a good thing as long as inflation does not increase and erode the buying power of the new middle class. Inflation has historically been a huge problem in Brazil, running to triple digits in the 1980s and 1990s. Official estimates now put it at a comparatively low 6.5 percent.

What’s an investor to do, with so many contradictory measures? Here are some thoughts.

THE CHANGE Ten years ago this week, Jim O’Neill, chairman of Goldman Sachs Asset Management, coined the term BRIC, elevating the profile of four countries — Brazil, Russia, India and China — that he thought were poised to become “growth economies.” He argued at the time that these countries contributed 8 percent of global gross domestic product and that in 10 years, their economies would account for about 14 percent. They’re now at 18 to 19 percent.

Mr. O’Neill said this week that he was surprised at how well Brazil had done, overtaking Italy to become the seventh-largest economy in the world.

“I found it really easy to be bullish about Brazil over the past decade,” he said. “I describe myself now as being a little bit more reserved. The biggest risk is if inflation were to get out of hand. There is no way you’re going to get the continued increases among the middle class if that happens.”

By Brazilian standards, he noted, inflation is low. Even if some analysts think it is above the 6.5 percent target rate, the central bank cut interest rates on Wednesday for the third time this year, a sign it is not concerned about inflation.

Francisco Alzuru, managing director of emerging market research at Hansberger Global Investors, said countries like Brazil and Mexico had reduced their debt-to-G.D.P. ratios significantly in the last decade, to levels better than in the developed world. And both countries, he said, had learned hard lessons from the crises of the 1990s that drove down the value of their currencies and pushed up the cost of borrowing.

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