Latin American Equities: More Than Meets the Eye
Despite the uncertain global macro backdrop, the combination of long-term structural trends and attractive current valuations is presenting a compelling opportunity in Latin American equities.
Latin America was one of the best performing markets globally in 2022. The region benefited from robust commodity export prices that were driven by global supply constraints, largely as a result of the war in Ukraine. This has stood in contrast to many developed and emerging countries which have suffered from inflationary pressures and fading growth.
“Latin American equities will continue to present unique long-term growth opportunities, which arguably remain unrecognized by many investors today.”
Looking ahead, while the outlook for the global economy is subject to near-term uncertainty and a potential recession in developed markets, we believe Latin American equities will continue to present unique long-term growth opportunities, which arguably remain unrecognized by many investors today. In particular, there are a number of supportive long-term trends benefiting the region—from the rise in nearshoring manufacturing, to the increasing importance of food security, to the urgency of the energy transition. In our view, companies that are directly or indirectly exposed to these sectors look poised for further growth.
1. Nearshoring
The practice of nearshoring—when companies invest in the production of finished goods closer to their home country to mitigate the challenges stemming from global sourcing—has accelerated rapidly post-COVID. As countries like the U.S. move to bring their supply chains closer to home, Mexico in particular stands out as a key beneficiary. In addition to its large and relatively young population of more than 120 million people,1 the country’s proximity to the world’s largest economy has cemented Mexico’s position as an emerging global manufacturing leader. This position is further reinforced by the numerous trade deals, including the United States–Mexico–Canada Agreement (USMCA), that Mexico has with over 50 countries.
As the nearshoring phenomenon continues to play out in the U.S., we believe Mexico will see significant investments which will stem from U.S. policies aiming to bring back production from Asia to North America. The recent supply disruptions globally have added fuel to this trend, with many companies moving from a ‘just-in-time’ to a ‘just-in-case’ mindset. Further underscoring Mexico’s attractive positioning, it takes less than five days to transport finished goods from a Mexican manufacturing base to the U.S., compared to five to six weeks on a container ship from Shanghai—and this can often be done at a considerable cost discount.
1. Source: United Nations Population Data. As of January 2022.
