Fernando X. Donayre
Portfolio Manager
INCA Investments, LLC
With markets set for continued outperformance and the economic environment constantly improving, the Latin American region is ripe with investment opportunity. Latin America is now in stronger fiscal shape than most developed countries. Inflation rates in the region have hit historically low levels, keeping interest rates low and creating a surge in consumer spending. The WIOF Latin American Performance Fund offers investors the chance to invest in a region where demographics, government economic policies and social development are combining to produce rapid consumer growth and an attractive investment environment.
GROWING ATTRACTIVENESS
The Latin American region has a range of increasingly attractive qualities on offer for investors, including:
Consumption growth and better margins.
Improvement in economic and investment environment.
Young population underpinning domestic consumption.
Political leaders reducing fiscal deficits and keeping interest rates low, creating a surge in consumer spending.
Emerging middle class with fast-growing incomes and spending power driving a long-term boom in consumption.
The Latin American economic and investment environment has improved dramatically in recent years. Political stability and an almost universal adherence to orthodox economic policies have ushered in a boom that is creating new economic opportunities for the region’s companies, increasing the size and affluence of the middle class and permitting the region’s governments to focus on sound fiscal management. Latin America is on better footing from a fiscal point of view than many developed countries in part due to this pursuit of rational economic policies. Lower unemployment and higher real wages have also boosted tax revenue, allowing for the region’s governments to pay down debt and provide more fiscal support during challenging economic times. Latin America’s debt as a percentage of GDP is considerably lower – both the region’s governments and corporate sector - than in developed countries.
NEWFOUND STABILITY
The region’s economic strength has already been proved in the global economic turndown of the last few years. During the worldwide financial crisis of 2008 and 2009, Latin American countries for the first time were able to step in and provide a fiscal stimulus. Chile tapped the funds from its copper export fund to provide a 2.7% boost to GDP, higher than that provided either in China or the US. Latin America’s economies overall, as measured by GDP, are also projected to continue to grow considerably faster than the average rates in the developed world. In 2010 the main Latin American countries’ real GDP growth rates were between 5% and 7%, outpacing the US, the EU and Japan. This newfound economic stability has increased standards of living across the region and given rise to a new and more affluent consumer class. During the past decade Latin America’s middle class expanded rapidly and now makes up for more than 50% of the population in the main Latin American countries. In Brazil for example, the middle class increased from 38% in 2003 to 51% in 2009. Consumption-oriented companies across the region are likely to be some of the biggest beneficiaries as the per capita incomes and purchasing power of this key middle income group continue to rise.
BABY BOOM
Besides boosting the demand for consumer goods, the increased buying power of Latin Americans has also expanded the demand for credit, creating expansion opportunities for the region’s financial services companies. Latin America’s long term consumer growth story is also being led by the region’s favorable demographics. A regional baby boom during the 1990’s guarantees a high percentage of working-age consumers with above-average spending power will populate the region during the next decades.
Latin American Population Breakdown
OUTPERFORMANCE
These factors together mean that Latin American markets are set to remain attractive investment propositions for the long-term, like the WIOF Latin American Performance Fund, with consumption growth pushing the region’s markets to outperform.
POISED TO BENEFIT
The region is also set to take advantage of a number of continuing positives. After some selling pressure in the first two months of the year, Latin America’s equity markets rebounded in March and are once more well positioned to benefit from the region’s ongoing political stability, adherence to pragmatic macroeconomic policies and overall strong economic picture. In the first quarter, Latin American markets were affected by outflows from emerging markets as investors reacted with unease to the political instability in the Middle East and the Japanese earthquake in March. However, Latin American markets are traditionally driven by their domestic markets, not global events, and investors are refocusing on the region’s key drivers: economic growth outlook and company fundamentals.
SECTOR FOCUS
The Fund’s focus is precisely on the sectors best suited to reap the benefits of the region’s transformation. The Peruvian and Chilean markets are currently very attractive due to their recent stock price declines and both countries’ strong economic outlook. In terms of the region’s largest markets – Mexico and Brazil - Mexico has been overlooked by some investors, making many of the country’s stocks increasingly attractive. The US economic recovery is also likely to boost the Mexican economy which should be reflected in Mexican equities. In Brazil, there is value in its financial sector which has direct exposure to the domestic economy through the consumer and corporate sector. The expansion of the Brazilian middle class and the growth of the corporate sector are driving the demand for loans, credit cards and mortgages: Brazil’s financial sector should be a direct beneficiary.
INVESTMENT MANAGER
The Fund is managed by Latin American investment specialists INCA Investments LLC. INCA’s local knowledge and experience allows it to find value in companies that are overlooked by others and uncover investment value in countries which non-specialised managers often do not pay sufficient attention to, including Peru, Colombia and Panama.
IMPORTANT NOTE:
This report has been prepared for information only, and it does not represent an offer to purchase or subscribe to shares. World Investment Opportunities Funds (“WIOF”) is registered on the official list of collective investment undertakings pursuant to part I of the Luxembourg law of 20th December 2002 on collective investment undertakings as an open-ended investment company. WIOF believes that the information is correct at the date of production while obtained from carefully selected sources considered to be reliable. No warranty or representation is given to this effect and no liability can be assumed for the correctness or accuracy of the given information which may be subject to change at any time, without notice. Past performance provides neither a guarantee, nor an indication of future performance. Value of the shares and return they generate can fall as well as rise. Currency fluctuations, either up or down, may also affect value of the investment. Due to continuing market volatility and exchange rate fluctuations, the performance may be subject to significant changes over a short-term period. Investors should be aware that shares in the financial instruments entail investment risks, including the possible loss of the invested capital. Performance is usually calculated on the basis of the relevant NAV unless stated otherwise. Performance shown does not take account of any fees and costs associated with subscribing or redeeming shares. It is assumed that all dividends were reinvested. WIOF prospectus is available and may be obtained through www.1cornhill.com. Before investing in any WIOF Sub-fund(s) investors should contact their financial adviser / legal adviser / tax adviser and refer to all relevant documents relating to the WIOF and its particular Sub-fund(s), such as the latest annual report and prospectus that specify the particular risks associated with the Sub-fund, together with any specific restrictions applying, and the basis of dealing. In the event investors choose not to seek advice from a financial adviser / legal adviser / tax adviser, they should consider whether the WIOF is a suitable investment for them.