International Investments in Latin America – Leverage the Samba


Investing in emerging markets especially Latin America equities is a good inflation fighting option. Latin America is the region closest to the US and Latin currencies thus are the least likely to fluctuate wildly versus the greenback.

We’ll be noting this fact as we add new portfolios to our Borrow Low – Deposit High Educational Service. We started five model portfolios October 21, 2005 and we reviewed them bi-weekly through the year.

During mid 2006 we had to cope with the second worst emerging market crash of the decade from March through July 2006. Despite this we have came through the year satisfied with the results of these real time, case studies. The performances of the five portfolios from October 21, 2005 to October 21, 2006 were:

Emerging Asia + 110.48%
Emerging Currencies + 42.86%
US dollar Hedge + 10.60%
US dollar Long + 8.81%
US dollar Short + 7.32%

The Emerging Asia and Emerging Currencies portfolios strongly over performed their projections. The three dollar portfolios gained less than projected, but still beat any US dollar, Euro or Western European currency bond yield or CD interest. The price for this extra performance was volatility.

Now we are adding several new portfolios:

Dollar Short Portfolio. This will differ from last year’s dollar short. This will be the real thing with a 100% dollar loan and no USD investments.

An Eastern European Emerging Portfolio. This will be leveraged with a Czech Koruna loan.

Finally, we’ll add a Swiss Samba Portfolio. This will be a portfolio of Latin investments leveraged with a Swiss franc loan.

This Swiss Samba portfolio makes sense. This year the region of Latin America has outperformed the other two emerging regions. Latin America Morgan Stanley Capital Index is up 17.4 %. Asia is up 15.2 % and Europe/Middle East/ Africa (EMEA) returned 4 %.

You can see below that Latin America as a region offers better value in five of the six value categories. This region offers a better price to cash flow, earnings and yield as well as greater cash flow and return on equity.

Region Price Book Value Price Cash Flow Price Earnings Dividend Yield Cash Flow Return on Equity Return on Equity
Latin America
2.38
7.9
12.3
2.65
30.0
19.4
Asia
2.08
8.6
14.0
2.40
24.3
14.8
Europe/Mid East/Africa
2.59
10.6
14.7
2.20
24.5
17.6

One of the investments will most likely be the Jyske Invest Latin America Equity Fund. The chart shows that the performance over the past five years has been strong.

You can see in another shorter term chart that this region was not immune to the emerging market meltdown earlier this year.

Not all is perfect in the region for sure. According to Michael Keppler’s good value analysis only one Latin market, Brazil, now offers top value. The top value emerging markets are Brazil, Korea, Malaysia, Poland, Taiwan, Thailand and Turkey at equal weights. Sell candidates include three Latin markets, Argentina, Mexico and Peru.

The Jyske Latin fund managers must be thinking the same way as the fund has almost 50% of its portfolio in Brazilian shares, an underweighted position in Mexico and almost no investment in Argentina or Peru.

Here is what the fund managers say in their review of this region:

Fund performance was adversely affected by declining commodity prices and the underweight of Chile . In September, Chile was the best performing market in Latin America and recorded an increase of 4.39%, followed by Mexico (3.32%), Brazil (-0.91%) and Argentina (-1,76%) in terms of USD.

The status of Chile as a safe haven in Latin America was the primary force behind September’s increases. Mexico was the second-best performing market in Latin America. Two factors had a significant impact on market developments; firstly, the victory of the market-friendly, Felipe Calderon, and secondly the fact that the Fed decided to suspend its policy of interest rate hikes.

In Brazil , the electorate has witnessed yet another corruption scandal in the final weeks of the presidential and parliamentary election campaign. Event though President Lula managed to dissociate himself from the scandal, he did not win the first round. Still, Lula, stands a very good chance of winning the 2nd round. The political mud-slinging is expected to continue until the second round of the election on 29 October.

Outlook

Current uncertainty as regards the global trend in interest rates and the level of global growth may in the short term result in considerable fluctuation in the Latin American equity markets. As may the period leading up to the 2nd round of the election in Brazil . We still consider Latin America a very interesting investment case.

You can learn more about the Jyske Invest funds from Thomas Fischer at fischer@jbpb.dk

We must watch whether Latin markets have topped and are now pricey, but even if they are for now, given global growth and Latin America ’s energy, the Swiss Samba may add some spice in our inflation fighting portfolios.

Gary

P.S. During its first year, our Borrow Low – Deposit High Educational Service, had the fortunate offer to be taken over by one of the largest publishing companies in the US. We looked at this offer in many ways and finally had to decline due to differences in various philosophical ideals. It seems that our desire to provide an intimate, fast paced, real time service, does not blend well with the restrictions that larger institutions must apply to themselves.

During this trial (and negotiating) year we maintained an artificially low price ($99 per annum) for our charter members of the service. Now are raising the annual fee to a higher, more sustainable level ($149 per annum).

However, you can still enroll (until next week) at the $99 per annum price.

We’ll be doing an annual summary of the five portfolios we began with plus introduce the new portfolio models we’ll study over the next year. You’ll receive all this in immediate enrollment. Details are at http://www.garyascott.com/catalog/bldh.html

One reason we love Ecuador is the Latin spice that adds to art and music. In our village there is art everywhere including this mural in the dining room of El Meson de las Flores.

Join Merri, Jyske Bank and me at our upcoming November International Business and Investing Course in Ecuador. Learn how to diversify globally. See http://www.garyscott.com/catalog/IBEZec/


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