Robust Latin American banks buck the global trend

Latin American markets have outperformed developed markets over the last year, buoyed by strength in commodities, minimal exposure to the sub-prime crisis and strong, domestic-led, growth. According to Urban Larson, manager of the F&C Latin America Fund, the region has over-corrected over the last two months, stocks are cheap and "investors may well be pleasantly surprised by the resilience of earnings, especially in Brazil". Although the region has not been immune to inflationary pressures, their central banks have been quicker to react. Brazilian inflation had remained safely in line with the 4.5% target but when it suddenly spiked in March the Central Bank changed course very quickly and has since raised rates by 175 bps, to 13.25%, which has succeeded in anchoring expectations. Colombia, Mexico and Peru have also moved quickly to hike rates as inflation has risen. This response is in stark contrast with the US and UK where monetary authorities have been slower to respond to rising prices, wary of slowing economic growth even further. The swift reaction places Brazil in a strong position to lower interest rates in 2009, although in the short term there will likely be more rate hikes.

The tough stance adopted by Latin American central banks is reflected in the continued strength of their financial sector. Larson said: "There has been very little sign of a slowdown in credit growth across the region. Lending growth in the first half of 2008 ranged from 25-35% across the region. In Brazil mortgage lending grew at 89% in the first half, but is still less than 2% of GDP, dramatically lower than the level seen in the UK or the US. We are very positive on the banking sector, which should continue to demonstrate strong balance sheets, high levels of profitability and very strong lending growth from a low base".

Larson remains cautious on commodity stocks, particularly materials, but he does hold some, commenting: "In energy, we believe the global market will remain relatively tight but importantly the biggest Latin American oil stock - Petrobras - is likely to boast very strong production growth for the next decade which is unique in a sector struggling to increase production."

"Domestically, the outlook for homebuilding and infrastructure in both Brazil and Mexico remains very positive. In the former, earnings in the first half of 2008 remained strong and the sector is far less sensitive to interest rate changes as mortgages are still in their infancy while the structural housing deficit is enormous. Both countries have ambitious multi-year plans for infrastructure investment."