recently announced its
plans to acquire Mexico's largest bank,
, for $12.5 billion in stock and cash, many observers considered the news a significant vote of confidence for Mexico's economy and its currency.
Recent Daily Interviews
Williams Capital Group's
To assess the prospects for investors interested in the Latin American markets, Daily Interview chatted with Paul Rogers, the co-manager of Scudder's
Latin America fund, which has returned 6.6% so far this year.
While economic and political crises have stymied growth and returns on investment in the region, Rogers maintains that stabilizing currencies and continuing economic and corporate reform will power the market growth in Latin America. He sees increasing domestic savings as key to stronger financial systems, less reliance on foreign debt and reduced volatility of currencies. The Banamex acquisition also highlights the potential for local operations to be acquired by multinationals looking to expand, Rogers says.
TSC: How does your fund's past performance reflect the evolving investment landscape in Latin America as a region? Has Latin America provided a certain counterweight to how the U.S. equity market has been performing?
In Latin America, the performance has clearly been spotty over time and has not really fulfilled the expectations people had a decade ago in 1990 and 1991. There was going to be this period of prosperity, increasing economic activity and growth throughout the decade. However, we've seen a number of crises occur, which did much to set back stock market performance.
These crises speak to the fundamental problem in Latin America: the absence of savings in the region, which makes it very difficult for the companies to grow at a rapid enough or a sustainable growth rate above 3% to 4% without experiencing physical problems. The problems are due to the fact that there's always a shortage of capital to finance that growth. I think that has been the story the past 10 years. Whenever growth seems to be going at a fast clip, there are always other structural imbalances that cause a crisis to occur, usually a currency crisis. Because of this, performance has not been as great for the sector or the region as a whole.
Rather than saying we made the wrong call by convincing people to look at this region, we were perhaps premature, because the capital markets had yet to develop fully, especially with regard to the banking and finance system. But a lot of that is changing now with the advent of the savings culture and pension funds. Increasing investments by primarily Spanish and now U.S. banks will also help strengthen the financial system overall.
TSC: Once the structural imbalances have been addressed, what factors would make Latin America a compelling place for investors to be down the line?
The old call used to be that Latin America offers diversification, because it behaves differently than the U.S., and is not correlated at all. This clearly has not been the case and if anything, the region has traded very much in line with the U.S. market.
Moreover, many of the companies in the Latin American market are on the
New York Stock Exchange
in the form of ADRs, and the traders in Latin America are very focused on what's happening in the U.S. as well as what's happening globally. Going international or regional because of diversification reasons is not what you're going to Latin America for. What the region offers is more alpha, namely what you're able to do because of the volatile market: You can look at the opportunities on a more strategic basis and pick up excess return.
TSC: You mean you can be more opportunistic in the region?
Right. And if you look at growth rates, despite all the economic and political concerns that are constantly in the news in these countries, GDP growth rates are still expected to be 3% to 4%, which is coming down with some short-term blips. I think if these Latin American countries can really overcome their financing shortfalls, 3% to 5% growth is very positive and will mean that the companies in the region will grow at a much faster clip than their counterparts around the world, particularly in more developed markets.
The consumer sector is our focus, because there is clearly a lot of pent-up demand in places like Brazil and Mexico for consumption. This means that you will see higher growth rates and therefore better earnings and higher stock market returns. For instance,
grew 1% in the U.S., yet its operations in Latin America grew by 3% to 4%. This will continue to be the case going forward, barring missteps.
TSC: What are some of the trends driving the growth of the companies in which you invest?
First I look at demographics: You have a rapidly growing population that's fairly young. And these people are more and more plugged into the world economy. The Latin American demographic trend will power the economies of these countries in the future. Also, this population will demand better democratic systems. While these systems are imperfect in places like Mexico and Brazil, huge strides have been made so far. So you bring this down to the company level, you're seeing increasing corporate reforms, improving positions of minority shareholders and more openness in financial reporting.
TSC: What is your assessment of Citigroup's acquisition of Banamex? How do you see U.S. multinationals entering the Latin American markets and competing?
I see the acquisition as the culmination of a trend that started with
in 1994, when we were beginning to see more convergence of commerce between the U.S. and Mexico, because of the proximity and operations along the border. Mexico is an increasingly important trade partner of the U.S. Citigroup's acquisition of Banamex is very big news, but the smaller news is that U.S. consumer product companies, such as
Procter & Gamble
, are increasingly turning to the region to generate larger profits.
By and large, when multinationals come into this region, they are willing to pay a premium to buy these local operations. The thinness of the capital markets means that it is often hard to get full valuation. Also the longer-term perspective of the buyers speaks to the opportunities in the region. It is hardly surprising that
was in Brazil but was not successful because it didn't have the right partner, and had some growing pains in its international expansion. But you need a relatively longer horizon for these things to come to fruition, about 3 to 5 years.
In fact, the financial sector is one of the last in which the convergence can occur, because the financial industry of the region is the least related to that of the U.S. That also bodes well for the reform of the economy and banking sector, which will be key to maintaining the economic growth.
TSC: Which companies do you like in the region and what are some of the stocks that U.S. investors could look at without concerns about liquidity and access in the U.S.?
Mexico and Brazil have the most developed consumer markets in terms of size and reach. Companies operating in these countries have large addressable markets and significant market share, which give them a huge lead over their competitors.
My best ideas are encapsulated in the top-10 holdings, which include Wal-Mart,
Telefonos de Mexico
, a cement manufacturer, which we consider as a consumer stock because of active development of properties going on. And these companies will continue to benefit from the convergence with the U.S.
is a very attractive company: Valuation is half that of global peers. While there's some justification for being well below other global operators, it has huge resources and great technology.
is a brewer and
bottler commanding 80% of the beer market in Brazil, and continuing to grow its position as a powerhouse.