An ETF to Grow with Latin America
02/19/2013 7:45 am EST
Rebounding global demand for natural resources, as well as a young and growing labor force, is boosting prospects in the region, notes Benjamin Shepherd of Personal Finance.
Latin American equities were relatively weak last year, underperforming most of the developed world, even as many European stocks made substantial gains on an improving regional outlook.
Over the course of 2012, the Brazilian Bovespa index rose just 7.4%, while Chilean equities gained an average 3.9%. Mexico was perhaps the one bright spot, as its IPC index rose 19.7%.
The region’s underperformance was largely due to conditions in the rest of the world. The slowing Chinese economy had a particularly significant impact on demand for Latin America’s raw materials, as the region’s export growth fell to just 1.5% in 2012.
While I don’t look for exports to return to their surging double-digit growth of 2010 and 2011 this year, I do expect a turning tide of demand to boost Latin American equities.
A raft of Chinese data shows that the country’s economy has likely bottomed out. Industrial production and retail sales both picked up in the fourth quarter, as confidence among manufacturers improved. While much of Europe will likely remain in recession in 2013, continued growth in the US will help boost commodity prices.
Since Latin America is much more closely tied to Asia and North America than Europe, I look for both economic growth and equity prices in the region to surprise to the upside, as long as commodity prices don’t retreat from current levels.
At the same time, the region is benefiting from its hugely attractive demographic profile. While the developed world is getting grayer, leading to a host of fiscal problems in terms of funding social programs, the Latin American population is very young, and the region’s workforce is actually growing.
The deep pool of workers has kept labor costs down in the region, but at the same time economic growth has led to sufficient job creation to drive average incomes higher. That’s resulted in a growing middle class that’s increasingly eager to spend money.
IShares S&P Latin America 40 Index (ILF) plays into both trends, with allocations to Latin America’s materials and energy sector as well as consumer names.
The fund’s top holdings include names such as America Movil (AMX), the Mexican telecom giant; Vale (VALE), one of the largest producers of iron ore in the world; and consumer names such as the beer and beverage companies Compania de Bebidas (ABV) and Fomento Economico Mexicano (FMX).
A 2013 laggard with a return of just 5.8%, the fund should gain momentum this year along with the rest of the global economy. Buy iShares S&P Latin America 40 Index.