Baring Asset Management believes attractive share price valuations provide a compelling case for investment in Latin America. Mike Simpson (pictured), who took over as manager of the Baring Latin America fund in October last year, comments…
At the country level, we are currently bullish on Brazil and Chile and are warming up to Colombia. We continue to maintain the majority of our holdings in Brazilian stocks, which we have seen provide a strong rebound after market falls. The stocks are currently attractively valued, with Central Bank easing and pro-growth fiscal policies supporting the macro economy.
Chile also presents a compelling case for investment, where the current price to earnings ratio (PE) is at a multi-year low at 15x, compared to the ten-year average of 18x. This has significantly narrowed the premium gap with Mexico, which is currently trading at a PE ratio of 14x.
We are keeping an eye on Colombia where, after a couple of years of underperformance, valuations are again becoming reasonable. Following a period of monetary tightening, inflation readings are stabilising, and so we are looking to increase our holdings through the consumer discretionary sector.
In terms of sector holdings, Barings is most positive on Brazilian financials and is expecting the sector to rebound once the macro prudential measures, which led to the sector underperforming in 2011, are unwound. Barings are also positive on Brazilian and Colombian energy companies and Brazilian utilities firms, the latter as a hedge against inflation.
We are looking to concentrate the portfolio down to around 45 high quality holdings from previous levels of 64 as at the end of 2011, to focus on ideas where we have our strongest investment conviction. We are seeking to maintain 70-80% of the portfolio in core long holdings with 20-30% in more tactical holdings.
Barings expects the emergence of a new middle class to play a key role in the region’s growth story with important consequences for asset allocation decisions. In general, an expanding middle class drives consumption and growth and encourages entrepreneurship and innovation, stimulating smaller businesses which make an economy thrive.
The Baring Latin America Fund aims to achieve long-term capital growth through investment in Latin American securities. Launched in April 1993, the fund has USD676.2 million of assets under management as 31 January 2012.