One of the main reasons for the incredible growth of the Chinese economy over the last 30 years was the low cost of labour – but unfortunately it looks as though increases in local wage rates are now making other markets more competitive.
It’s an ill wind, and all that. One of the major beneficiaries has been Mexico, which is now attracting manufacturing companies back from places like mainland China. These migrating businesses typically produce high value added products such as cars, planes and medical devices for American consumers just over on the other side of the border.
The safest way to benefit from the growth of a small market like Mexico is to use a more diversified regional fund, such as Aberdeen Latin American Equity. This has a 20.5% weighting in the country – although its key position is the 64.4% allocation to Brazil, which has many attractions of its own – most notably, a large and youthful consumer population and huge mineral and farming resources.
Aberdeen Latin American Equity has had a bumpy ride, and it is currently up just 6% since it was launched in February 2011. The main reason for the lacklustre return is that the region had a poor 2012, underperforming the developed markets and the broader emerging markets.
This in turn was largely because of Brazil, which suffered as a result of the weakness in natural resources due to concerns about the level of global economic growth and China in particular.
The fund’s managers believe that the outlook for the region is more favourable, and that there is the potential for substantial growth. They think that the main driver in Brazil will be domestic demand and characterise it as a stock picker’s market. Mexico is seen as more of a macro opportunity with US companies bringing back manufacturing from China. This has had a positive impact on local wages and employment and has boosted consumer demand. Higher infrastructure spending should also help to increase growth and improve competitiveness.
Much of the fund’s focus has been on domestically orientated businesses with sustainable earnings and good cash flow, hence the 28.6% weighting in Financials and 22.1% in Consumer Staples. The significant outperformance of these areas has led to some bargain hunting in the more cyclical and commodity-related sectors where the managers look to buy the best-in-class operations with good quality assets. There is no doubting the potential for growth in the region and a successful stock picking team like that at Aberdeen Asset Managers should be well-placed to take advantage.
Name: Aberdeen Latin American Equity
Fund Size: £93.1m
Launch Date: February 2011
Portfolio yield: n/a
Ongoing charges: 2%
Manager: Aberdeen Asset Managers