Which countries are the best picks for Latin America investors?

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While Latin America has enjoyed a recent period of growth, the political changes of the region’s main trade and investment partner, the United States, has left many questioning whether the outlook for markets . In our view, there are still opportunities for investors to tap into Latin America’s growth potential, so long as they keep two clear risks in mind.

As mentioned above, the first risk is that the Trump administration’s protectionist agenda will have a direct impact on economies like Mexico, which are highly dependent on US trade. Nonetheless, this could create favourable exchange rate conditions for companies whose core of operations are outside the market where they are locally headquartered, and could thus enjoy a favourable exchange rate when repatriating earnings, even under complex circumstances.

The other risk comes from China, which has been a major source of foreign direct investment for Latin American countries like Peru. China’s ongoing capital outflows, coupled with its rising debt to GDP ratio point to an unsteady basis for growth. This is a systemic threat to Latin American countries that must not be ignored.

Yet, opportunities do exist. In Brazil, we can confidently state that the 2015–2016 recessionary phase has come to an end and the economy has continued to recover during the first months of 2017. On top of that, fiscally prudent policies adopted by the Brazilian government are improving the outlook for the country. Brazil appears to be implementing a set of structural changes that point of a long term improvement in the country’s markets; the success probability of these changes imply a cautious, yet positive, outlook for the country.

After a few quarters of hard times brought on by the US presidential election, Mexico also seems to be recovering. The belligerence of the election campaign has apparently given way to economic pragmatism in Washington, with the result that the Mexican peso appreciated by close to 11 per cent against the dollar in the first quarter of 2017.

Moreover, while the North American Free Trade Agreement stands a good chance of being tweaked, the kind of no-holds-barred fight that could do major damage to Mexico’s economy and exports now looks like a much less likely prospect. In light of these events, we are sticking to our cautious, yet optimistic view on Mexico.

The other country that we like and where we see opportunities is Argentina. Mauricio Macri’s surprise victory at last elections was not only a welcome development, but also one of historic importance. The new President has put together a high-quality cabinet, which bodes well given the challenges at hand. In Argentina, domestic loans to the private sector account for a mere 16 per cent of GDP, putting it among the frontier markets with the lowest stock of private credit in the world. Such a degree of under penetration has worked to the advantage of our investment, and will continue to do so.

Other growth opportunities will come from the stabilisation of the commodities market. Most Latin-American countries, like Colombia and Chile, have economies that rely heavily on commodities for trade, public finance and investment. If correctly managed, the more politically-stable countries in the region should be able to leverage the solid backdrop in commodities.

Didier Saint-Georges is managing director and member of the investment committee at Carmignac