Investing in Latin America: A Great Way to Gain Exposure to Commodity-Producing Economies

I have been listening to Chris Mayer’s book, World Right Side Up: Investing Across Six Continents, which is essentially a journal of his travels around the world, visiting different countries and searching for investment opportunities.

It’s a great book and well worth a read, and in my opinion, the ideas are even more relevant today than when it was written. What struck me while listening to the book is how much the world has changed since it was published in 2012.

Many emerging market countries he visited were at the top of the world, while the U.S. and Europe were licking their wounds after the financial crisis. The countries doing particularly well were big commodity producers, flush with cash after the commodity supercycle of the 2000s.

Contrast that with today, where most such countries have struggled after a long bear market in commodities, while the tech-heavy U.S. stock market has dominated all other strategies.

This illustrates an important point: Certain emerging markets are highly leveraged to commodity markets, but more developed markets can be vulnerable if commodities do well. As I am bullish on commodities right now, I want some exposure to companies in countries that will be net beneficiaries of a commodity bull market.

One region I am getting more bullish on is Latin America, particularly Colombia and Brazil, which might offer interesting investment opportunities now. Since commodity markets broadly peaked in 2011-2012, both country ETFs have been on a downward slide.

Here’s the ​​Global X MSCI Colombia ETF (NYSEArca: GXG):

And here’s the iShares MSCI Brazil ETF (NYSEArca: EWZ):

Besides being leveraged to commodities, which have not performed well lately, there are other reasons why these country-specific ETFs have been trending lower. Both countries have recently elected political leaders perceived to be unfriendly to investors, causing their ETFs to sell off even more. I think it’s true to a certain extent that both Lula and Petro are not friendly to investors, but today, those leaders are unfortunately far from unique in that respect.

What’s different in the case of Colombia and Brazil is that the market has largely factored that into stock prices at this point. Both ETFs have PE ratios of around 7 and dividend yields above 6%. That may not sound like much, but these are depressed earnings and dividends close to the bottom of their cycle.

Interestingly, we have a historical precedent we can look at as Lula was the president of Brazil during the last commodities bull market. If we look at the EWZ chart from 2003-2011 we can see that Brazil did great during that time. 

He may have different policies now, of course, but nonetheless, a great bull market can forgive a lot of potentially bad policies. 

Maybe history will rhyme this time around; who knows? I think that, given the low prices of the country ETFs and their leverage to commodities, they might not have much downside and a lot of upside potential.

There’s a good chance they go lower in the short term, especially if there is widespread fear in the stock market and people sell everything to raise U.S. dollars, but I would likely see that as an opportunity to allocate more.

If you’re interested in going further than the main ETFs, there are both opportunities to buy bombed-out, deep-value equities or quality companies trading at reasonable prices.

Moerus Capital has done great work in Latin America recently, finding high-quality companies at very reasonable prices. Some interesting ones are Bancolombia (NYSE: CIB) and Arcos Dorados (NYSE: ARCO); both are high-quality companies selling for fairly low PE multiples, have good free cash flow yields, and in the case of Bancolombia, around a 10% dividend yield.

With that said, I have not invested much yet as I am still learning more, and there might be a better opportunity in the near future to do so. But when I see great countries that I believe have a good chance of doing well going forward and other smart investors starting to invest there, I get very interested. I will continue following these countries, learn more, and hopefully invest in great stocks, sharing some insights here when I do so.

Maybe one day, a few years from now, the continent will again be flush with cash and at the top of the world like it was in Chris Mayer’s great book mentioned above. I want to invest early before that happens.

Thanks for reading!

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Disclaimer: This article is for informational purposes only and does not constitute investing advice. Please consult with a qualified financial advisor before making any investment decisions.