Cast a net in the stabilised economies of Latin America

The Fund Manager: 'Private companies have always been well managed, but the problem has always been on the government side. What has changed now is that government economic management has improved'

By Keiron Root

By Keiron Root

11 October 2000

When UK investors think of Latin America, they usually have visions of hyperinflation, weak currencies and "banana republic" governments of dubious morality and little financial skill. But Rodrigo Pinheiro, manager of the Old Mutual Latin American Companies Fund, says that all belongs to the past.

Mr Pinheiro, born in Portugal, started as an analyst with local stockbrokers, after graduating in economics from the University of Oporto.

After three years in corporate finance, he came to England to study for an MBA at the Cranfield School of Management, then joined Old Mutual's UK operation as the analyst in Latin American markets.

Despite the changing reality, Mr Pinheiro knows there are big psychological barriers to British investors putting their money in the region. "Latin America has always had very good companies," he says.

"The private companies have always been well managed, but the problem has always been on the government side. What has changed now is that government economic management has improved and they are being supported by the electorate.

"Low inflation is the most important factor. People don't want hyperinflation, it makes them panic, so there is considerable public support for governments to bring inflation down and keep it down. The key thing is whether they can sustain this.

"I saw the effect of Portugal coming into the European Union, with interest rates falling from the mid-20s. The mentality of a country changes completely when you bring interest rates down by that much.

"Now, for example, Brazilians are experiencing nominal interest rates of 16.5 per cent for the first time in their lives, but the market is not reflecting these changes yet."

The focus of the portfolio is firmly on the main markets of the region, particularly Mexico and Brazil, which between them make up just under 80 per cent of the MSCI Latin America Free Index and around 87 per cent of the Old Mutual Latin American Companies' portfolio.

Mr Pinheiro says : "I manage the fund on a sector basis, looking at clusters of companies, since companies within the same sector can react very differently to things like interest rate changes.

"I concentrate on the big companies and we have about 43 or 44 holdings in a fund of around £15m." The largest holding is Telefonos De Mexico (Telmex) at just under 9 per cent, followed by the Brazilian oil stock Petrobras (8 per cent). No other stock accounts for more than 4 per cent of the total.

"Petrobras is interesting because it is trading at a 50 per cent discount to other major global oil companies and it is a stock I like. Telecom stocks are very cheap because the sector has corrected massively and I have been increasing exposure to Brazilian telecoms. These have very low ratings by international standards. In Mexico, I am keen on the banks. The market hasn't yet priced in the value of their involvement in insurance and pensions.

"You find companies in the region that are trading at much lower levels than similar companies in developed markets.

"These companies are cheap because they have a low cost of capital - stocks such as Grupo Televisa in Mexico, which is the largest Spanish-speaking media company in the world, with a very strong management and a strong and stable US dollar cashflow, or Telmex, the largest telecom company in Latin America, with links with Microsoft and SBC. It is a very efficient telco with one of the highest margins in the world.

"Then in Brazil you have CVRD, which is the largest iron-ore company in the world with the lowest cost of production, and Embraer, the world's fourth-largest manufacturer of commercial aircraft and the lowest-cost producer of regional jets, with links to major European aerospace companies. This is a stock that is currently on a very low p/e of nine times.

"Money is going almost exclusively into the big markets. There is a lot of political instability in smaller markets, Venezuela, Colombia and Peru and these are a long way behind the bigger markets.

"The oil price has been very good for Venezuela, but the political situation is so bad we don't know where the country is going."

Mr Pinheiro's fund has exposure to only two other markets, 7 per cent in Chile and less than 5 per cent in Argentina. "The trouble with Chile is that it trades more like a developed market - it is much more highly valued. Brazil and Argentina are connected markets and Brazil and Mexico are different.

"For example, if the oil price rises that is good for Mexico, as a producer, but bad for Brazil, as a consumer. Mexico is dependent on the US - it is really a 52nd state - but for the rest of Latin America what really matters is world growth.

"Mexico and Brazil have benefited from reforming policies for years and, as a result, their budget deficits are modest, inflation is better controlled and interest rates have been declining. Currency values have been generally stable, although Mexico and Brazil suffered crises in the Nineties.

"Brazil has managed the extraordinary feat of capping inflation at 8 per cent and bringing it back to below 5 per cent, despite 1999's major devaluation and the surging of oil prices.

"The fiscal deficit in Brazil was largely a social security problem and they have done remarkably well to bring this down. I did not think they could do it in such a short time."

A further encouraging factor is the significant increase in investment in the region by major global companies.

Mr Pinheiro adds: "Privatisation has meant multinationals investing a lot of money in the region and these are players who take a long-term view. They have been putting millions into Mexico and Brazil in particular.

"Brazil received around $30bn last year and a further $22bn so far this year. The multinational involvement also ensures governments stick to their reforming policies because they will take their investment away if they don't."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Arts and Entertainment
The teaser trailer has provoked more questions than answers
filmBut what is Bond's 'secret' that Moneypenny is talking about?
News
Johnny Depp is perhaps best known for his role as Jack Sparrow in Pirates of the Caribbean
peopleBut how did he break it?
Arts and Entertainment
Paul Walker and Vin Diesel in Fast and Furious 5
film
Sport
Lewis Hamilton secured his second straight pole of the season
f1Vettel beats Rosberg into third after thunderstorm delays qualifying
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Retirement Coordinator - Financial Services

    Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

    Recruitment Genius: Annuities / Pensions Administrator

    Negotiable: Recruitment Genius: You will be the first point of contact for all...

    Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

    £18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

    Ashdown Group: Learning and Development Programme Manager

    £35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

    The saffron censorship that governs India

    Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
    Prince Charles' 'black spider' letters to be published 'within weeks'

    Prince Charles' 'black spider' letters to be published 'within weeks'

    Supreme Court rules Dominic Grieve's ministerial veto was invalid
    Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

    How did fandom get so dark?

    Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
    The galaxy collisions that shed light on unseen parallel Universe

    The cosmic collisions that have shed light on unseen parallel Universe

    Dark matter study gives scientists insight into mystery of space
    The Swedes are adding a gender-neutral pronoun to their dictionary

    Swedes introduce gender-neutral pronoun

    Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
    Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

    Disney's mega money-making formula

    'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
    Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

    Lobster has gone mainstream

    Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
    Easter 2015: 14 best decorations

    14 best Easter decorations

    Get into the Easter spirit with our pick of accessories, ornaments and tableware
    Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

    Paul Scholes column

    Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
    Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

    The future of GM

    The greenhouses where Monsanto 'plays God' with the future of the planet
    Britain's mild winters could be numbered: why global warming is leaving UK chillier

    Britain's mild winters could be numbered

    Gulf Stream is slowing down faster than ever, scientists say
    Government gives £250,000 to Independent appeal

    Government gives £250,000 to Independent appeal

    Donation brings total raised by Homeless Veterans campaign to at least £1.25m
    Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

    The most borrowed book at Bank of England library? Oh dear

    The book's fifth edition is used for Edexcel exams
    Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

    Cowslips vs honeysuckle

    It's the hunt for UK’s favourite wildflower
    Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

    Did a botched blackmail attempt help Cyril Smith escape justice?

    A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss