Political uncertainty has meant Pendal is holding a zero weighting to four Latin American countries in its emerging markets fund, despite being overweight to Brazil and Mexico.
Paul Wimborne and James Syme, managers of the Pendal Global Emerging Markets Opportunities fund, said it traditionally liked the strong relationship between gross domestic product (GDP) growth and commodity prices in the region.
“Latin America has historically shown a strong relationship between GDP growth and commodity prices — and also between US dollar equity returns and commodity prices. The moves in export prices feed through to commodity-based economies in many ways. Trade balances and current account balances strengthen, tax revenue rises, corporate wages and investment can rise,” they said.
“This upward pressure on currencies, corporate earnings and liquidity creates a potentially very attractive opportunity for equity investors like us.”
However, it was choosing to retain zero exposure to four other Latin American countries due to the political uncertainty; Argentina, Peru, Chile and Colombia.
For Argentina, in particular, the managers said the country was “uninvestable” due to its indebtedness, inflation, and weak economy. It also had a populist government and high unemployment.
“Argentina has the least-functional politics of the four. The populist government of President Fernandez and vice-president Kirchner has struggled repeatedly with indebtedness (mostly to the International Monetary Fund), inflation and a weak economy,” the managers said.
“Consensus economic forecasts for 2021 are for CPI inflation at 45% and unemployment at 11.5%.
“Until there is prospect for a change of political leadership, Argentina is effectively uninvestable in our eyes.”
In Chile, the president was unpopular and there were problems for the mining industry thanks to upcoming legislation which would restructure the relationship between commodity producers and the state.
In Colombia there were fiscal problems regarding its fiscal deficit which had expanded to 8.9% and in Peru, the prospect of a win for hard-left populist Pedro Castillo in the presidential elections was placing stress of financial markets.
The Pendal Global Emerging Markets Opportunities fund returned 20.6% over one year to 30 April, 2021 versus returns of 26.1% by the global emerging market sector within FE Analytic’s Australian Core Strategies
