First steps for Latin lovers

Investing in Latin America is exciting - and the rewards can be considerable if due care is taken, writes Simon Read

The samba, like the tango, is a hot and spicy dance which comes from Latin America. Aficionados say there is nothing like it for excitement - but for the uninitiated it is more likely to lead to spills than to thrills.

Much the same is true of Latin American investment opportunities: they offer heady promises, which can end in an expensive fall.

Be wise, and take the same approach to Latin American dances and investments: tread cautiously, but accept that if you're fleet of foot, you could be in for a good time.

"There's a lot of volatility," says Gawaine Lewis, an investment manager based in Fort Lauderdale, Florida, who researches Latin America for the investment company Abtrust. "Like all most emerging markets there's a big spend on infrastructure, and lots of direct investment from overseas.

"The US, for instance, is strongly represented in Latin America because the region provides low-cost operations for building cars and so forth. On top of that, the region is rich in natural resources, such as gold mining and copper production. All this is, of course, attractive to foreign investors - but the difficulty is politics."

Latin America has traditionally been a political hot spot, famous for dictators and internal strife, where the only financial certainties were corruption and inflation.

But things have changed: there has been an outbreak of democracy across the region, with even Chile's despotic General Pinochet out of the picture, and investors have been able to profit from a period of relative stability. "The market has done exceptionally well this year," says James Hancock, emerging markets fund manager with Guinness Flight. "In Mexico, for instance, some stocks have even doubled."

But investors have been slow to return to Latin America after the big economic crisis that hit Mexico at the end of 1994 and beginning of 1995. Since then Mexico has done incredibly well, say commentators: the economy has recovered and inflation is down.

"But political tensions will resurface in the run-up to the 1997 election," warns Mr Hancock. "This means there are still some big questions about Mexico."

Elsewhere in the region, politics is likely to continue to play a major part, and the volatility of the market reflects investors' continuing worries. "In Argentina, for instance, the finance minister who had been the architect of the country's economic reform became unpopular and was sacked recently," reports Gawaine Lewis. "His departure made US and European investors nervous and the market dropped by around 20 per cent. Now, a few months later, it's back to its previous level. That kind of market movement is typical of the region."

So these markets are not for the nervous. Long-term investing is essential, and you must be prepared to accept downward blips. That doesn't mean investing your whole portfolio in the area and expecting it to grow over time. It may be worth investing a small part of a portfolio in Latin America to take advantage of possible growth, but being prepared to keep a close eye on events on the continent and switch cash out if necessary.

"We're backing the current administration in Brazil," says James Hancock. "They've already achieved a lot and know what needs to be done." But with elections due in 1998, the current Brazilian president knows he has to change the constitution to allow him to stand for a second term and continue his good work. Whether he can get the constitutional reforms through remains to be seen.

These are the factors that will determine your view to Latin American investment. There are gains to be made in the area, but they won't come easily. Finding the right fund may only be the start of your problems.

Comparing performance figures highlights the difficulty. Over five years, most Latin American funds look poor. The Abtrust Latin American fund, for instance, is down 8.68 per cent, say the market statisticians HSW. Over one year, however, the fund is among the best in the international growth sector, up 16.77 per cent. The disparity is due to the Mexican economic problems two years ago.

Top of the international growth sector over one year at present is the Abbey Latin American fund, up 22.08 per cent, closely followed by the Baillie Gifford Latin America fund, which is up 21.49 per cent.

If you are worried about being overexposed, you could pick a worldwide growth fund investing partly in Latin America, and partly in the economies of other regions.

It depends on whether you see yourself at the investment dance as a wallflower, sipping mineral water and ensuring you don't embarrass yourself, or out on the dance floor knocking back the Tequila and doing the tango with the best of them