Latin America has experienced tremendous volatility in recent years, but the region is emerging from the fallout of political scandals, weak commodity prices and little or no economic growth. With these issues moving to the back seat, the region is seeing an uptick in investment, which may be a boon for investment portfolios.
Tierra Funds Managing Principal Jamie Anderson, who has worked in the region since the early 1990s, believes that right now is a great time for investors to get exposure to the region, particularly Brazil and Mexico, as Mexico remains stable and grows its entrepreneurial class, while Brazil emerges from the worst recession it's faced in years.
"Mexico has had investment grade status for five years, it's looked at as a quasi-extension of the U.S. economy and long-term capital is being attracted towards the country," Anderson said. "Brazil on the other hand, is emerging from a three-year quasi-depression and as it emerges from the ringer, specifically around real estate, it's attractive."
In conjunction with ISE, Tierra Funds launched Tierra XP Latin America Real Estate ETF (LARE) , which has heavy exposure to both Mexico and Brazil, but also iArgentina and Chile. The ETF also intends to have exposure to Colombia shortly.
According to Tierra funds, the Tierra XP Latin America Real Estate ETF has a projected dividend yield of more than 5%. It has been one of the better emerging market ETFs year-to-date, gaining 31%, compared to the benchmark iShares MSCI Emerging Markets Indx ETF (EEM) - Get Report , which has gained 15.9% since the start of the year.
TheStreet recently sat down with Anderson to find out what's going on in Latin America and what makes the Tierra XP Latin America Real Estate ETFattractive.
TheStreet: What makes you confident in Latin America as a region and are there any places that look more attractive than others?
Anderson: When you're talking about Latin America, you're really talking about Brazil and Mexico. Peru and Chile are becoming a greater part of the economic pie, but it's really just Brazil and Mexico. Mexico's relatively attractive as it relates to global investors. It has investment grade status and global capital is being attracted here. It has a stable economy, and the middle and upper-classes are growing.
Unlike the U.S., Brazil is looking at an interest rate cut. We're looking for a stabilization and bottoming there, and when the Brazilian central bank starts to cut interest rates, you'll see asset prices continue to appreciate. Brazil has performed well because of a rebound in its currency, and as a result, foreign direct investment is increasing sharply.
TheStreet: What areas or sectors look particularly attractive in Latin America?
Anderson: We're very bullish on the Latin American consumer, particularly in consumer discretionary as well as staples. Those sectors that did well in the U.S. and Europe in the 1950s and 1960s will do well here, primarily because of demographics. There are a lot of 18- to 34-year-old people there, so as the economy grows, they'll be buying things like diapers, houses and dishwashers. In Mexico, the services sector has really grown since the 1990s, and we could see the same thing in Brazil as well.
For real estate, we're bullish on property types that are tied to the consumer -- shopping centers, the hospitality sector -- those kinds of areas. We're also bullish on domestic transportation, airlines and then food and beverage. Fast casual didn't really exist ten years ago, and now most major brands operate in Latin America. I'm also pretty bullish on consumer finance, but that's mainly in Mexico.
TheStreet:We've seen some political instability in the region, but that's calmed down recently. Are investors getting too comfortable here?
Anderson: I think investors have become increasingly optimistic as the Petrobras (PBR) - Get Report corruption case has marched forward. In the last week, they've indicted Lula (former Brazilian president Luiz Inacio Lula da Silva), and they've arrested two of the most senior finance ministers under former president Dilma Roussef and Lula. The indication is that the criminal probe is not slowing down, and it's expanding. I think investors like that, because corruption has been long a standing issue in Brazil, and bringing it to the public eye is constructive for the country, doing business and it shifts attention towards more pro-economy government.
TheStreet: How dependent is this region on natural resources like oil. If we see another drop in oil prices again, does that cause the instability to come back?
Anderson: I don't think it will for the simple reason we're seeing the economy in Brazil bottom without a robust commodity rally. This year we're talking about decline of 3% in the economy, and next year, they're talking about growth. Though these numbers are ugly, it's the Brazilian economy in transition without the commodity benefit. Like China and other commodity-exporting countries, Brazil has the potential to grow the internal consumer. It requires fiscal reform, attracting foreign direct investment and we see all of those things taking place. If oil meanders in high $30 and $40 range and it remains somewhat volatile, it's not something that will change the near and medium-term prospects for recovery in Brazil.
TheStreet: Tell me about the Latin America ETF, its holdings and what makes it a good investment.
Anderson: LARE has 61 components, mostly split 50-50 between Mexico and Brazil. It has some exposure to Chile and Argentina and will eventually include Colombia. When you talk to investors, they say the idea of doubling my money is great, but they can't handle the volatility. The LARE has the lowest volatility among emerging market ETFs and it also provides great diversification. The EEM has a 90% correlation to the S&P 500, whereas the LARE has a 51% correlation to the S&P 500.
In Mexico, you might see asset prices pull back or meander for a bit, but here, you get the combination of the stability in Mexico and the upside of Brazil. It's a nice way to increase income and get growth potential.