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LatAm carries next populist threat, warns AA-rated manager

LatAm carries next populist threat, warns AA-rated manager

As Europe approaches the end of its election cycle global investors should look towards Latin America where populist candidates could still cause widespread volatility in the market.

That is according to Verena Wachnitz, who manages the T Rowe Latin American Equity fund.

Speaking to Citywire Selector, the AA-rated manager said there were question marks over Peru, Brazil, Chile and Columbia, which all face elections in the next year.

Wachnitz said, despite recovering from the sell-off after Donald Trump became President of the US, Mexico could suffer if the leader of the Mexican populist party, National Regeneration Movement (MORENA), gets into power.

‘Mexico has presidential elections mid-next year. It is a single round contest, so whoever gets the majority of the votes in the first and only round wins and there is a chance that Andrés López Obrador could perform well,’ Wachnitz said

‘The economy is slowing and the average voter is very worried about corruption, while he is presenting himself as fighting corruption. So this could be a source of volatility for Mexico over the next nine months. The economy has performed better than expected but the political uncertainty could weigh on the markets and currency at some point.’

Valuations

Wachnitz devotes 20% of the fund to Mexico, which is underweight against the benchmark by 8.8 percentage points. She said she sought to exploit opportunities caused by volatility in Mexico due to the elections and currently struggled to find ideas.

‘It is difficult to find names where valuations are extremely compelling. There are high quality companies that I find attractive for the medium and long run.

'Walmex is an example of that, as, from a top down perspective, I struggle to find ideas in that market compared to places like Brazil, which remains a very large market,’ Wachnitz said.

The real estate sector makes up 7.7% of the fund, which is overweight against the benchmark by six percentage points. As interest rates have risen in Mexico, the sector has suffered but Wachnitz has found opportunities.

‘In real estate I still see rents well below the average that you see in other regions and the high quality shopping malls and developers have been punished by the increase in interest rates that we have seen in Mexico. Inflation could improve in the future and interest rate increases in Mexico should moderate or come to a halt.'

Over three years to the end of July 2017 the T Rowe Latin American Equity fund lost 4.91% in US dollar terms. This compares to a fall of 11.93% by its Citywire-assigned benchmark, the MSCI EM Latin America TR USD, over the same time frame.

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