paul-gWhen investing in emerging markets it is key to understand the political backdrop. In the past few years in Latin America we have seen corrupt, left wing, business-unfriendly governments that have resulted in under performing growth or recessions across the region, despite its excellent demographics with young populations.This has dragged asset prices and currencies down.

 

However, we are seeing a shift to centre right pro-business friendly governments. In Argentina and Brazil we have seen the disastrous Kirchner and Rousseff regimes replaced by much more credible alternatives and we believe this has opened up some exciting opportunities.

Peru’s previous ineffective President has been replaced with the legendary Pedro Pablo Kuzneski – ‘PPK’. Having held numerous high level positions at the World Bank, IMF and on Wall Street, PPK has long been one of the most qualified and highly respected economists in the world. If that isn’t enough to convince you he

is the real deal, before he studied at Oxford and then in the USA, PPK was educated right here in Lancashire at Rossall School, Fleetwood. Now if there’s anyone that can run a country, it’s surely got to be somebody that understands the importance of fish, chips and mushy peas for Friday tea.

His handpicked cabinet, from the party he formed himself, boasts a plethora of foreign PhDs and former champions of Peruvian industry. They form one of the most competent, pro-business boardrooms on the planet, with the empowerment to drive the economy forward.

Top of the agenda is infrastructure  investment. In its first five months the government lined up a portfolio  of infrastructure projects which total $33bn. Around four million of Peru’s 30 million population do not have access to safe water and double this number do not have access to adequate sanitation. PPK has pledged, by the time he leaves office, all Peruvians will have access to potable water and a sewerage system. Other projects include transport, education and health. This is not a wish list as the government is well on with pushing these through, eliminating bureaucratic obstacles.

As well as infrastructure, the government is committed to creating jobs and formalising the country’s workforce to ensure 5 per cent year on year GDP growth, although we are expecting figures in excess of this, given the acceleration already showing under the new government.

How then, do we look to capitalise on the reform-driven growth that we expect in Peru? I’ll look at just one example – Credicorp. Peru’s largest bank is highly transparent  and has a very consistent growth record. Fifty per cent of the adult population still do not use formal banking services compared to over 90 per cent in developed markets so there is much room for further penetration. We expect continuing increases in saving, borrowing and insurance needs to support the bank’s growth for many years to come. Despite this, it is valued much more reasonably than many developed market banks with very benign growth prospects.We believe that this is largely due to being part of an unloved region and that there is good reason to believe this will reverse over time.

It is quite possible, with all the political change, that Latin America will move from shunned to champion in the next few years. In the meantime, with a selective, disciplined approach I believe there are many pockets of value to find in the region, but stock selection is absolutely key to avoid those companies that are still corrupt and shareholder unfriendly.

Risk warnings: Opinions constitute our judgement as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment.