Baring Asset Management (Barings) believes that a backdrop of heightened volatility across risk assets means a more cautious view on the outlook for Latin American equities over the rest of the year.
However, improving growth and inflation numbers and strong domestic demand mean a number of sectors continue to show promise.
Roberto Lampl, Head of Emerging Market Equities at Barings says, "Against the headwind of US and fringe Europe debt problems and the negative impact on global growth, we maintain that volatility levels will remain elevated for sometime. However we also believe there is very little chance of contagion affecting Latin America in view of the problems that persist in fringe Europe, especially in relation to widening bond spreads. In terms of investment opportunities we favour a number of domestic names with pan-regional revenue streams, ahead of exporters with exposure to the developed markets.
"We are more positive on macro fundamentals, particularly in Brazil where the monetary tightening cycle may be nearing its end for the year as annual inflation approaches its peak. Mexico is also showing signs of recovery, in our view, and considering the Presidential election is due in July 2012 we could see higher levels of spending on social services and infrastructure during the run-up.
"Peru is now more settled politically following the resolution of the recent election and Ollanta Humala being confirmed as the next President. He has already announced a politically diverse cabinet and kept the Central Bank President in place and we believe this has reintroduced stability in the country. An elevated price environment for gold, and increasingly silver in recent months, has also supported the commodities-heavy Peruvian economy and precious metal miners like Buenaventura, which we continue to favour."
In terms of portfolio positioning at a sector level, relative to the benchmark index, the Baring Latin America Fund is underweight financials and materials while overweight defensives like telecoms, healthcare and consumer.
At a country level, Barings believes that the result of a slowdown in the Brazilian economy could have a cooling effect on inflation expectations which might make its view more positive on the Brazilian equity market in the coming months. However, says Roberto: "The Brazilian Real has little room to appreciate further, it added 1% versus the US dollar in July, and could depreciate if the interest rate outlook changes.
Roberto continues: "We are neutral on Mexico and have very little exposure to companies trading with the US, instead favouring a pan-regional tilt to our holdings. Though Chile has better growth and inflation numbers we are underweight the market there and also in Colombia, which remains relatively expensive and where its central bank has raised the policy rate for the sixth consecutive month.
"We are neutral on Peru but in terms of sectors we are overweight Metals and Mining, preferring companies currently benefiting from an elevated precious metals price rally. In fact we have increased exposure to gold miners given we hold a positive view on gold as a hedge against inflation and safe haven asset during risk-off and volatile periods.
"From a stock-specific point of view we think copper and iron ore miners such as Chile's Antofagasta will continue to benefit from strong demand from China and India, and should outperform as a result."
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