Investment opportunities in Latin America

Last fall, portfolio manager Michael Reynal said he hoped to see a turnaround in Mexico and Brazil following presidential elections. And he wasn’t disappointed. Both countries, he says, provide opportunities in 2019.

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The chief investment officer at Sophus Capital in Des Moines, Iowa broke down what to expect from Brazil, Mexico, Chile and China.

Brazil

In Brazil, President Jair Bolsonaro is hoping to deliver pension reforms later this year that would improve productivity and competitiveness, said Reynal in an April 12 interview.

“The Brazilian pension system is on the brink of bankruptcy, costing the government and economy far too much,” said Reynal, whose firm sub-advises the Renaissance Emerging Markets Fund. “Once we see that reform come through, that will allow for liquidity, lending and a pick-up in economic outlook.”

The pension reform aims to change workers’ pension contributions, raise the minimum retirement age and close loopholes to save about 1 million reals (US$260 billion) over the next 10 years.

Further, Reynal is “very excited” to see Brazil emerge from the recession it’s been in for almost four years. In 2018, Brazil’s economy grew 1.1% year over year.

He’s looking for growth to pick-up in the latter half of 2019 and for a “significant pick up in 2020” in both economic activity and the stock market.

Mexico

Mexican President Andrés Manuel López Obrador, whom Reynal called a “pragmatist,” took office last year on a left-wing platform for economic growth, particularly among the poor and working classes. This would be a boon for Mexico, as the economy is “very oligopolistic,” said Reynal. “We would love to see that economy broaden out and wealth trickle down.”

He sees opportunities in the consumer and industrial sectors.

Chile

Reynal is also excited about Chile’s “robust” economy.

“Chile has quietly delivered high growth for years, and we’re still looking for growth between 3% and 4% in 2019 and 2020,” he said. “While that particular market is somewhat expensive, it is also very high quality. We see opportunities in consumption, retail and, possibly, in the pulp and paper space.”

China

China will continue to do well, Reynal said in April, speaking before the trade tensions with the U.S. were exacerbated this month. He said he expected a trade agreement between the U.S. and China. “Both sides have too much to lose for this trade tussle to become an all-out war.”

Reynal predicted the Chinese economy would grow more than 6% in 2019, following 6.4% growth in 2018. Consumption will be key to China’s growth, he said.

“We continue to see urbanization of the Chinese population, specifically over the next decade,” he said. “We’ll see another 200 million people move from rural China to urban China. They will live in new apartment buildings. They will have refrigerators. They will buy motorcycles, and possibly cars. They will open bank accounts. And they will consume clothing [and] food.”

And while growth may be slower, it will be of higher quality, which is “more friendly to the foreign investor,” he said.

Additional integration between global and Chinese companies would mean “that China becomes a profitable growth market for foreign investors,” he said. This means foreign companies would have better access to the Chinese market and would benefit from the rule of law.

For instance, he said he hopes to eventually see American and Canadian banks operating freely in China, and for U.S. and foreign tech companies to operate 100% separately from Chinese counterparts.

“Ultimately, that’s what the U.S. would like in these trade negotiations,” Reynal said.

That integration would remove a lot of fear from the stock market, he said. “The upside that we see from a more stable capital flow will be delivered.”

That’s already happened this year with the increase in liquidity by the introduction of the A-share market into global indices, which Reynal said was “wildly exciting” and has generated “a frenzy of activity and interest.”

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