Humberto Garcia recently spoke with Juan Carlos Arancibia of Investor’s Business Daily about how the Brazilian banking sector could benefit from better credit quality in consumer, commercial & industrial portfolios of Latin American banks.
Investor’s Business Daily, March 9, 2018
By Juan Carlos Arancibia
While most major world stock markets are lower or slightly higher this year, Latin America has emerged as a pocket of strength.
Brazil’s Bovespa is up about 13%. That gain helps explain the success of iShares Latin America 40 (ILF), one of the most widely held Latin ETFs, with $1.87 billion in assets. The fund is up about 12% in 2018, well above the SPDR S&P 500 ETF (SPY) and other major world index ETFs.
The iShares ETF owns 40 of the largest companies in the region, blue chips that are selected for their investment appeal, fundamentals and liquidity. The portfolio is concentrated on financials, with about 36% of assets in that sector. Materials, energy and consumer staples account for 14% to 17% each.
Geographically, iShares Latin America 40 is almost exclusively weighted on three countries: Brazil is 60% of the fund, Mexico 22% and Chile 11%. Peru and Colombia have small participation and are the only other nations in the portfolio.
As far as individual holdings, Brazilian stocks have been the fund’s stars: oil giant Petrobras (PBR), Banco do Brasil, financial services firm Itausa and Itau (ITUB), a subsidiary of Itausa that’s also Brazil’s largest bank.
The banking sector, which makes up more than a third of the Bovespa index, should benefit from better credit quality in consumer and commercial and industrial portfolios of the banks, says Humberto Garcia, head of global asset allocation for Bank Leumi USA.
“We are very bullish on Brazil as it steadily emerges from its deepest recession ever and from a wave of bribery scandals that introduced uncertainty across industry sectors,” Garcia told IBD. “Consumer confidence is improving and inflation is under control at under 3.5%, so people are out buying. Purchases of autos and durable goods were on a steep ascent throughout 2017 and reflect pent-up demand from the hard years.”
In Mexico, the outlook is uncertain with the presidential election July 1, NAFTA negotiations and other issues with the U.S., its largest trading partner, Garcia says. He sees Mexico’s economy this year growing at a similar rate to last year’s 2%.
“A quick look at GDP data shows strength in machinery and equipment manufacturing, retail, transportation and finance,” he added. “Restaurants, food and beverages all seem to be doing well. After several years of increase, domestic auto sales were down in 2017, which reflects the similar downward trend in consumer confidence.”
For both Brazil and Mexico, energy production is strategically important but a small part of the countries’ economies, Garcia says. “State-owned Petrobras produces and also imports oil for its refineries, so rising oil prices help and hurt.” For Mexico’s Pemex, which is also government owned, exports amount to only a small percentage of GDP.
The ETF made most of its 2017 gains in January and has been pausing for several weeks. It is forming a base with a potential buy point at 39.64. Shares have found support at the 50-day moving average.