Weighing Latin America's Juggernauts

11/22/2012 10:00 am EST


Heiner Skaliks

Portfolio Manager, Strategic Latin America Fund

Mexico and Brazil are two excellent places to invest, albeit for totally different reasons, says Heiner Skaliks, who explains his strategies for each.

We're talking the two Latin American juggernauts. We're here with Heiner Skaliks, and we're discussing two of probably the biggest markets in Latin America. But I don't think, other than that, investors really understand what the dynamics are at play, and how best to utilize these markets as investors.

Well, you mentioned that Mexico and Brazil are the largest companies in Latin America. They are indeed.

We at Strategic Latin America Fund (SLATX) invest not only on the equity front, but also on the fixed-income front, and in currencies as well. So whenever I ask the question, "What's hot in Latin America-why Mexico, or why Brazil?" I always give them the "depends" answer, and that is, it depends on what you're looking for.

If you're looking for fixed-income opportunities, for example, we favor Brazil in that sense, because their base rate is extremely high. The Selic is currently at 9%, so they have a high hurdle to overcome on the fixed-income rate. We're not so bullish on the equity market in Brazil, because we see that the growth prospect is not as strong.

On the other hand, in Mexico we favor the equity space, one of the main reasons being that any recovery from the US market will have a direct spillover onto the Mexican market, and also because many of the Latin American companies that have a regional presence are headquartered in Mexico. So they're deploying their regional strategy out of Mexico, and they're tapping into new markets, so we see more of a growth potential in Mexican equities than we do in Brazil, for example.

And I've heard that with Mexico, there's been talk that immigration is now falling to the United States because the Mexican government has implemented some new rules and laws that make it more investor-friendly, and it's easier for business to grow and develop in Mexico. Is that the case?

Well, we've seen-not just in Mexico, but throughout the region-what we've seen is more active government participation on two fronts, on both the monetary policy front and also on the fiscal policy front.

Specifically on the monetary policy, we've seen central banks lower their rate to foster economic activity, and we've seen fiscal policy by the reduction of taxes, for example, so that all that money starts flowing back into the country. It has that multiplying effect and stays in the country, to strengthen the economy should there be a significant global slowdown.

So they're buttressing the economy beforehand, and then they're hoping that their boat rises with the United States' fortunes.

In the specific case of Mexico, yes. In the case where they're shielding themselves or preparing themselves for a possible downturn; that is also the case.

Who would have thought Latin America would be a region where last year we went through at least ten credit upgrades, whereas Europe was going through credit downgrades, as well as the US? We have seven investment-grade countries in Latin America, so I think in that sense Latin America has matured and evolved significantly in the last ten to 15 years.

Do you have any favorite Mexican equities that you'd like to share?

Like I mentioned, on the Mexican front we do favor equities. And one of the needs that you have, not only in Mexico but throughout the region, are housing needs. There's a huge housing deficit, and an infrastructure deficit, and what you need in order to have those civil works off the ground is cement.

In that case, we favor Cemex (CX). Depending on what the Mexican peso is doing and what the investment profile is of the investor, Cemex will lay the foundation for Latin American investing.

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