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Latin America: A Range of Opportunities for Active Investing
Acapulco, Mexico
2 Emerging Market Experts
MIRAE ASSET GLOBAL INVESTMENTS NEW CHINA: IMPACT OF THE CHINESE CONSUMER
As Latin America’s second-largest economy
and the US’ third-largest trading partner,2
Mexico offers an array of investment
opportunities. The country is currently
undergoing favorable economic reforms,
improving the labor market, as well as in the
telecom and energy sectors. Oil accounts for
around 20% of fiscal revenues and thus
remains an important part of the country’s
ability to grow. However, the energy reform,
which aims to privatize the oil sector, is
particularly attractive to investors who are
looking for direct exposure to the structural
benefits of Mexico’s equity market.
Economic growth is ticking up with real
gross domestic product (GDP) growth
projected to reach 2.8% for 2016, up from
2.5% the year before.3 This growth is largely
driven by the consumer who has been a
resilient, bright spot for the Mexican
economy. The domestic market is benefit-
ting from low inflation, low unemployment,
low interest rates and positive structural
reforms. Inflation, as measured by the
consumer price index (CPI), in Mexico
reached a low not seen in almost five
decades (chart 1). Inflation for 2015 was
2.7%, down from 4.0% the year before,
driven by falling prices for electricity, food,
and phone services. As inflation stays near
record lows, this translates to more spend-
ing money for the Mexican consumer.
Latin America: A Range of Opportunities for Active Investing
In 2016, Latin America roared back to become the best performing emerging market equity region with a return of 25.7% year-to-date through June 30.1 A year ago, it was one of the worst performing regions for equity investors. The Latin American region remains highly distinct with some countries experiencing economic growth while others are experiencing cyclical downturns that may soon see a revival as global growth and trade recover. Each of these countries offers a different set of investment opportunities, risks and challenges which is why active management is so important. This region has historically been sensitive to global growth and a potential recovery presents opportunities through highly discerning stock selection in these markets.
Here we take a close look at the two largest Latin American economies by GDP, Brazil and Mexico, and share our insights about how Mirae Asset invests in these countries.
1 MSCI.2 Office of the United States Trade Representative3 World Bank, Global Economic Prospects.
1966
1973
1980
1987
1994
2001
2008
2015
%
0
20
40
60
80
100
120
140
CPI (
annu
al)
Chart 1: Inflation in Mexico at Record Lows
Source: World Bank.
Mexico: A Confident Consumer
Emerging Market Experts 3
LATIN AMERICA
Alsea
Alsea is a Mexican multi-brand
restaurant operator that is
well-positioned to benefit from
increased discretionary spending
of the Mexican consumer. Alsea’s
net sales grew at a compounded
annual growth rate of 31.9%
from 2011 to 2015. Some of the
brands that Alsea operates in
Latin America include Burger
King, Domino’s and Starbucks.
Source: Alsea’s Annual Report 2015.This figure does not reflect a measure of performance for any mutual fund.
2011
2012
2013
2014
2015
0
10,000
20,000
30,000
40,000
Mex
ican
Pes
os (i
n m
illio
ns)
Alsea’s Net Sales
Unemployment in Mexico has also been
declining steadily (chart 2). Last year, Mexico
had one of the world’s lowest unemploy-
ment rates at 4.3%, compared to Germany
at 4.6%, the US at 5.3% and the European
Union at 9.4%.4 Mexico’s downward trend
of unemployment has continued into 2016,
falling to 3.7% in March, the lowest in
almost eight years.5 Another positive
employment factor is from remittances or
the transfer of money by a foreign worker to
a relative in his or her home country.
Remittances, the second-largest source of
foreign exchange for Mexico after exports
and an important source of revenue for
Mexican households, are also rising. In
2015, flows from remittances were higher
than oil exports, which reached $24.8 billion
(chart 3). Most of these remittances come
from the US and are another channel that
ties the US economic cycle to that of
Mexico and its consumers. We see the
employment growth as sustainable given
how competitive Mexico has become in a
global context and now offers global
companies an inexpensive back door entry
to the world’s largest market, the US.
The low unemployment rate, coupled with
low inflation, supports discretionary
consumer spending. In February of 2016,
Mexico’s year-over-year retail sales reached
a record high of 9.6%, up from 5.2% in
January.6 Consumer credit is also experienc-
2009
2010
2011
2012
2013
2014
2015
03/2
016*
Unem
ploy
men
t Rat
e
0
1
2
3
4
5
6%
Chart 2: Mexico’s Unemployment Rate Continues to Decline
Source: OECD, *Bloomberg.
2010
2011
2012
2013
2014
2015
US D
olla
r (in
bill
ions
)
19
20
21
22
23
24
25
26
Chart 3: Remittances into Mexico are Rising
Source: Banco de Mexico.
4 OECD.5 Bloomberg.6 Trading Economics, Instituto Nacional De Estadística y Geografía.
4 Emerging Market Experts
MIRAE ASSET GLOBAL INVESTMENTS
combined.8 Mexico is also a relatively young
country, with approximately 45% of its
population under 25 years old and an
average age of 27.3. Within the next 10 to
20 years, Mexico is expected to reach its
lowest total dependency ratio in a century.9
Mexico’s urbanized area has increased
significantly since 1940, with the urbaniza-
tion rate rising from 35% to over 77% in
2015.10 This large, young and urban group
of consumers, with increasing disposable
incomes, can have a considerable impact
on high-quality companies that cater to the
Mexican consumer.
LATIN AMERICA
Brazil, Latin America’s largest economy, has
been one of the best performing equity
markets in 2016, not only in Latin America,
but across the developed and emerging
market regions. In the first half of the year,
Brazil’s equity market returned an impressive
46.5%.11 This is made even more remark-
able given that Brazil’s equity market was
one of the worst performers of 2015,
declining more than 41% (chart 4).
Yet, despite the notable rebound of Brazil’s
equity market, led by a recovery in global
market expectations and a potential bottom-
ing out of commodity prices along with
optimism over potential market-friendly
policy reforms, the country remains very
Brazil: A Reversal of Fortune?Chart 4: Brazil has been a Standout Performer in 2016
Brazil
EM Latin America
Emerging Markets
-50 -40 -30 -20 -10 0 10 20 30 40 50%
2015 2016 YTD (6/30/16)
7 JP Morgan Latin America Equity Research, May 2016.8 Forbes.9 CELADE, The Latin American and Caribbean Demographic Centre.10 INEGI.11 MSCI.
ing healthy growth as consumer confidence
increases. Currently, credit penetration in
Mexico is low by both global and regional
standards, at around 17% of GDP versus
68% in Brazil and 125% in South Korea.7
This ability to increase leverage in the future
differentiates Mexico from many other
emerging markets and means that con-
sumption growth is still in its early stages.
Mexico is the 11th most populous country in
the world and with over 122 million people
has a potential consumer base as large as
those of Spain, France and Portugal
We see the employment
growth as sustainable
given how competitive
Mexico has become in
a global context.
Past Performance Does Not Guarantee Future Results.
Emerging Market Experts 5
LATIN AMERICA
fragile. Brazil is currently facing a host of
issues including political unrest involving the
country’s impeached President, an econom-
ic recession plagued by high unemployment
and high inflation, growing government debt
and sovereign rating downgrades to junk
status by major rating companies. Brazil’s
economy is expected to continue to
contract this year before returning to growth
in 2017 (chart 5). What’s needed now, in our
opinion, is for structural reforms to lead to a
period of sustainable growth by improving
business and consumer confidence which
has been at an all time low but is starting to
turn (chart 6). The political changes currently
occurring in Brazil could be the catalyst for
that. We expect reforms to help increase
investments and private spending, and
lower inflation which should lead to lower
interest rates and spur growth. The impact
of reforms cannot be underestimated in the
emerging markets and their effect on the
equity markets can be meaningful.
Despite Brazil’s near-term economic
difficulties, its equity market still offers
exciting investment ideas and access to
high-quality companies. Many companies
can still thrive even in a difficult economy
and we, as investors in the emerging
markets, see this as an opportunity to
increase our existing positions or as an entry
point to invest in structurally sound compa-
nies with strong management teams and
solid business models. As the country
undergoes potentially transformative reforms
and should confidence and growth return to
the economy, underpinned by a more
business friendly environment, these
companies are expected to benefit.
Chart 5: Brazil’s GDP Growth is Lower than the Rest of the Emerging Markets
2014
2015
2016
F20
17F
2018
F
%
-6
-4
-2
0
2
4
6
Real
GDP
Gro
wth
Brazil Emerging Markets
Source: World Bank, Global Economic Prospects, Jan 2016.
Chart 6: Brazil’s Business and Consumer Confidence are Heading in the Right Direction
2006
2008
2010
2012
2014
2016
60
70
80
90
100
110
120
Industrial Confidence Index
Optimism
Pessimism
Consumer Confidence Index
Source: Getulio Vargas Foundation (FGV), Credit Suisse.
MIRAE ASSET GLOBAL INVESTMENTS
RaiaDrogasil
RaiaDrogasil is Brazil’s largest
drugstore chain. The company
has demonstrated that a strong
business model can provide
growth even in a weak macro-
economic environment. Since
2005, RaiaDrogasil’s gross
revenues have grown more
than seven times.
RaiaDrogasil’s Gross Revenues
2005
2007
2009
2011
2013
2015
Braz
ilian
Rea
is (i
n bi
llion
s)
0
2,000
4,000
6,000
8,000
10,000
Source: RaiaDrogasil.
F=forecast. Forecasted numbers are projections and not guarantees.Past Performance Does Not Guarantee Future Results.
6 Emerging Market Experts
MIRAE ASSET GLOBAL INVESTMENTS LATIN AMERICA
12 World Bank, Global Economic Prospects 2016.
Other Emerging Latin America EconomiesIn Latin America, with all the attention
focused on Brazil and Mexico, it’s easy for
investors to forget that some of the most
interesting investment opportunities can be
found in the smaller markets of Peru,
Colombia and Chile. In Peru, the equity
market may have poor liquidity but market-
friendly reforms have made the country more
attractive to investors and its economy is
viewed as having the fastest growth potential
in Latin America. Meanwhile, Colombia is still
dealing with the fiscal constraints from
current oil prices but its economy, driven by
infrastructure spending, is expected to
expand by 3.0% in 2016, slightly better than
the world GDP growth of 2.9%.12 Chile
continues to struggle with low consumer and
business confidence but benefits from
economic and political stability. Despite
these headwinds, active equity investors can
still seek to uncover potential opportunities.
Active Investing in Latin AmericaLatin America is home to a diverse group of
countries with each economy moving in a
different direction and affected by different
macroeconomic issues. Mexico’s consumer
economy is showing resilience amid global
volatility while Brazil is facing near-term
economic challenges.
As an active, bottom-up investment
manager, Mirae Asset can analyze each
country and each individual company based
on its own set of circumstances. This allows
us to discover high-quality companies that
have the potential to outperform in the
long-term, even in a tumultuous economy,
and also seek to avoid risky companies with
weak fundamentals. The equity markets in
Latin America may be more susceptible to
cyclical swings so the need for an active
manager who understands these markets
becomes even more essential.
Emerging Market Experts 7
LATIN AMERICAThe views and information discussed in this brochure are subject to change and may not reflect the current views of the writer(s). The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such oes not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation.
Consumer Price Index (CPI) — measures changes in the price level of a market basket of consumer goods and services purchased by households.
Gross Domestic Product (GDP) — is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
Past performance is no guarantee of future results.
Investment Risk — There can be no guarantee that any investment strategy (risk management or otherwise) will be successful. All investing involves risk, including the potential of loss of principal. Emerging Markets Risk — The risks of foreign investments are typically greater in less developed countries, which are sometimes referred to as emerging markets. For example, legal, political and economic structures in these countries may be changing rapidly, which can cause instability and greater risk of loss. These countries are also more likely to experience higher levels of inflation, deflation or currency devaluation, which could hurt their economies and securities markets. For these and other reasons, investments in emerging markets are often considered speculative. Similarly, investors are also subject to foreign securities risks including, but not limited to, the fact that foreign investments may be subject to different and in some circumstances less stringent regulatory and disclosure standards than US investments.
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Mirae Asset Global Investments
East Tower 26F, Mirae Asset CENTER1 Bldg,
67, Suha-dong, Jung-gu,
Seoul, Korea (100-210)
Tel.+82-2-3774-8200
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Level 15, Three Pacific Place, 1 Queen’s
Road East, Hong Kong, HK
Tel.+852-2295-1500
Mirae Asset Global Investments (UK)
4-6 Royal Exchange Buildings,
London, EC3V 3NL, United Kingdom
Tel. +44-20-7715-9900
33 rd
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1350 Avenue of the Americas,
Floor, New York, NY, 10019, USA
Tel. +1-212-205-8300
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6F, NO. 42, Sec.2 Zhongshan N. Rd.,
Taipei City 10445, Taiwan (R.O.C)
Tel. +886-2-7725-7555
400 098, India
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Unit No. 606, 6th Floor, Windsor Building
Off. C.S.T Road, Vidyanagari Marg.
Kalina, Sanatacruz (East), Mumbai
Tel. +91-22-6780-0300
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Rua Olimpíadas, 194/200,
12 Andar, CJ 121, Vila Olímpia
São Paulo, CEP 04551-000, Brazil
Tel: +55-11-2608-8500
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