The ripple effect – major commodities are back in demand

Latin America produces around 40% of the world’s copper and two-thirds of its lithium [1], so the region is always sensitive to movements in commodity markets. When demand is high, the ripples are felt everywhere.

That’s certainly true of Peru, one of the world’s largest copper producers. Like much of the region, the country has struggled in recent years, hit disproportionately by COVID-19 then squeezed by higher inflation.

So, as was reinforced to me in discussions on this research trip, higher copper prices are good news and have injected more positivity into the economy.

Higher prices bolster government coffers. This not only means more investment for infrastructure projects but also raises hope that it can kick-start the private-sector investment cycle the country has been sorely lacking.

The main driver for this resurgence is the green transition. Copper and lithium are essential for electric-vehicles batteries, generation and storage, and powering the vast data centres required for the artificial intelligence boom.

Governments are investing billions in upgrades. The US, for example, is at the start of a once-in-a-century infrastructure project. The Federal-State Modern Grid Deployment Initiative, signed off by the Biden administration earlier in 2024, includes 10 new transmission projects, connecting nearly 20 gigawatts of power to the grid. 

Hitting the ground running

Even in this recent downturn, well-managed companies haven’t been standing still. Credicorp, a leading Peruvian financial institution, is a prime example. Meeting senior management on this trip, they reiterated the company’s focus on risk management and robust cost control, which has resulted in superior profitability compared with its peer group.

Through its subsidiary, Banco de Crédito de Perú, Credicorp has invested in digital wallet Yape, a fast-growing mobile payments platform, with 16.5 million users across Peru and Bolivia [2]. This has allowed the firm to gain market share and tap into a much broader audience. 

What does the new Mexican presidency mean for investors?

With a healthy balance sheet and relatively stable economy, Mexico is also well positioned for economic growth. Additionally, it will benefit from providing low-cost labour to support the US industrialisation programme.

We have identified several well-run companies in the country capable of generating attractive returns and income for shareholders. These include two airport operators, ASUR (Grupo Aeroportuario del Sureste) and OMA (Grupo Aeroportuario Centro Norte). Airports benefit from having a captive customer base in terms of those travellers who pass through their airports. They control charges for areas including parking and duty free, as well as fees for restaurants and other elements where they are able to benefit from strong pricing power. Air travel is an underpenetrated area in Mexico. We believe there is large room for growth, particularly as more people move from expensive long-haul bus journeys to travelling by air instead.

One note of caution, however, is the follow-on effects from this year’s presidential election. Claudia Sheinbaum takes over from her mentor Andrés Manuel López Obrador (known as ‘AMLO’) in October.

Her plans for the next six years, including debottlenecking the country’s security system and addressing Mexico’s water shortages, have been well received. Nonetheless, there's speculation that AMLO could use his last month in office to push through some policies previously blocked by Congress, such as constitutional change. Uncertainty around this ‘golden month’ could prove disruptive for markets.

Based on the conversations our analysts and investment managers had during recent trips to the region, we believe this risk is relatively low.

Positivity spreads

Our visit reinforced the vibrancy evident in many countries across the region. In Colombia, for example, I was impressed by the hustle and bustle on the streets – it’s a country that’s working hard to ensure its oil profits are staying within its borders to help the economy grow.

But while we pay attention to the bigger picture, the focus for us as investors always comes back to company fundamentals. And here there are also many reasons to be upbeat.

One is Brazil’s Odontoprev. The country has the highest number of dentists in the world, with more than 360,000, as well as a further 36,000 oral health technicians. Odontoprev is the largest private dental insurance provider in Brazil, with 6.3 million members. It directs patients to independent dentists through its insurance programmes. It's a cash-flow generative business with a clear competitive advantage through its scale over peers.

Optimism and opportunity

As ever, our starting point is cash flow. We target companies with healthy cash-flow streams underpinned by strong competitive positions. We believe these businesses, disciplined in paying dividends, with greater capital awareness, are more aligned with their shareholders and make for better long-term prospects.

In terms of market performance, Mexico and Brazil had difficult starts to 2024. However, this is more linked to macroeconomic uncertainty rather than anything related to company fundamentals. This means valuations could offer a more attractive point for investors looking for companies with the potential for income growth.

Rising commodity demand and the support of industrial programmes give us plenty of optimism for the future of companies across much of the region, presenting opportunities for investors. 

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Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.