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Emerging Markets are expected to be increasingly large contributors to the global growth in the coming years. Usually China and India come to mind when investors think about emerging markets investing, but investors should not ignore Latin America, which has some of most dynamic growing economies.
Most Latin American countries are rich in natural resources and have positive demographics with a younger population and rising middle class. With improved economic policies and booming natural resources, the region has witnessed strong surge in foreign direct investments in the past decade. As a result of increase in wealth, domestic demand and consumption is rising in most countries. Read: Latin America ETFs, Beyond Brazil.
According to IMF, the prospects for Latin America and the Caribbean remain promising, with economic growth expected to pick up pace in 2013, after a slight slowdown to 3.7% in 2012 (from 4.5% in 2011).
However the investors should remember that since most countries in the region are commodity exporters, their growth rates are driven by the global economic environment, in particular the growth in China and the Chinese demand for commodities, which has come down recently. But the long term potential for the region remains very attractive.
Among the countries in the region, we think Peru, Colombia and Brazil offer the best opportunities to the investors. Argentina has been in news recently due to shocking plans to takeover YPF, its largest oil and gas company. With the populist policies being followed by the Government to draw the attention away from the serious economic problems in the country, most investors will prefer to stay away from Argentina. (Read: Argentina ETF In Focus On Nationalization Proposal).
Below, we take a look at the country ETFs with the highest growth potential in Latin America.
Peruvian economy has been growing at an average rate of 6.4% per year since 2002. Last year the growth was close to 7% after 8.8% growth in 2010, partly due to strong private investments. Peru is one of the top producers of gold and silver in the world. In addition to precious metals, its main exports are copper, zinc, textiles, and fish; its major trade partners are the U.S., China, Brazil, and Chile. Despite strong performance, the economy remains subject to fluctuations in global economic trends due to its large dependence on mineral and metals exports. The central bank has kept the key rate unchanged at 4.25% since May last year as “inflation expectations have remained within its target range and pace of economic growth has remained close to potential”. Per IMF, the economy will grow at 5.5% and 6.0% in 2012 and 2013 respectively.
MSCI All Peru Capped Index Fund (EPU - ETF report).
Launched in June 2009, this fund tracks MSCI All Peru Capped Index. The ETF currently has $541.6 million in AUM and 28 holdings. The fund has returned an impressive 26.5% since inception (as of March 31, 2012) and 17.8% during last quarter. It charges 0.59% per year in operating expenses to the investors. The fund has highest exposure to materials (54%), followed by financials (24%) and consumer staples (8%).
Due to surge in oil output and sound economic policies, Colombian economy has had GDP growth exceeding 4% annually since 2004, except during the global financial crisis in 2008 and 2009, versus an average growth rate of 2.3% during 1994-2003. The economy grew at 5.9% in 2011 and is projected to grow at 4.7% and 4.4% in 2011 and 2012 respectively (per IMF).
The country is enjoying a huge oil boom, primarily due to critical reforms to its oil sector, such as partial privatization of state-owned oil company and allowing foreign companies to bid for licenses without having to partner with the state oil company. Crude production has almost doubled over the past few years.
Growing consumer demand in the country caused rise in inflation to well above the midpoint of the central bank's target range (though among the lowest in the region), leading to rate hikes, last year and earlier this year. However as the inflationary pressures have started stabilizing, the central bank left rates on hold at 5.25%, in its March meeting. (Read: Is ARGT A Better Latin America ETF Pick?)
Among the negatives-unemployment rate at 10.8% is among the highest in the region. Apart from high unemployment, poor infrastructure, income inequality and drug trafficking remain the main challenges for the country.
Global X FTSE Colombia 20 ETF, (GXG - ETF report).
Designed to track the FTSE Colombia 20T Index, GXG made its debut in February 2009. The index is a market capitalization weighted index of 20 most liquid stocks in the Colombian market. The fund charges 78 basis points annually and has returned almost 200% to the investors since inception. Currently the fund has $168.9 is net assets and 21 holdings. In terms of industry breakdown, material stocks have 26% weight, followed by financial services (21%) and energy (14%).
IMF expects the economy to grow at 3.0% and 4.1% in 2011 and 2012 respectively, while the inflation is expected to come down. Slowdown in China is a matter of some concern, but the domestic consumption is growing and will be a significant driver of economic growth. With a low unemployment rate (6.0%), a rising middle class and generous pay increases (wages are indexed to inflation and GDP growth), the domestic demand has continued to grow.
The central bank cut the key rate last week to 9%; it’s lowest in two years, in order to stimulate growth which fell to 2.7% in 2011, from 7.5% in the previous year. With inflation subdued at around 5%, the central bank now has more flexibility on the monetary policy front.
iShares MSCI Brazil Index Fund, (EWZ - ETF report).
The ETF tracks MSCI Brazil Index, which is comprised of publicly traded securities in the Brazilian market. The fund has $8.71 billion in assets (making it the biggest Latin American equities ETF) and holds 81 securities. In terms of sector weights, financials (23%) and materials (21%) occupy the top spots, followed by energy (19%).
The fund -started in July 2000, has returned 13.7% since inception. During the first quarter of 2012, the fund returned 13.4%, after a terrible performance during 2011, when it lost 22.3%. It has an operating expense of 0.59% per year.