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Music is still playing for Latin America carnival

LATIN America has always been seen as dangerously volatile by many institutional investors, but the recent stock market carnival is looking like a party too good to miss.

The region’s leading economy, Brazil, is now firmly established as one of the BRIC big four. It is also due to host the World Cup in 2014 and the Olympics in 2016, which should raise its international profile and boost infrastructure investment.

The Brazilian stock market grew 70 per cent over the past 12 months, according to MSCI, while Mexico returned 61 per cent, Chile grew 49 per cent and Colombia delivered a mind-blowing 97 per cent.

The region is attracting new fund entrants, such as JP Morgan Asset Management’s Brazil Investment Trust, launched in March.

But carnivals don’t last forever, even in Latin America, so are new investors in danger of getting a mighty hangover?

Brazil is by far the biggest economy in the region, accounting for more than 70 per cent of Latin America’s growth, says David Barron, head of investment trusts at JP Morgan Asset Management. “People think its economy is dominated by natural resources companies, but domestic consumption is also growing and consumer debt is much lower than in the West. Throw in the World Cup, the Olympics and new oil discoveries, and Brazil is on a roll.”

Long-term prospects are also exciting. “Latin America is attracting much greater interest from institutional investors. Some still want to spread risk investing in global emerging market funds, but many are increasingly happy to use Latin American funds,” Barron says.

Fund returns have been spectacular in recent years. BlackRock Latin American investment trust, launched in 1990, returned an astonishing 322 per cent over the past five years, according to Trustnet.com, and 77 per cent over the past 12 months.

Investors can also choose from a handful of UK-based unit trusts, including Scottish Widows Latin American, up 308 per cent over five years, Threadneedle Latin American, up 290 per cent, Invesco-Perpetual Latin America, up 281 per cent, and Neptune Latin America, launched in 2007 and up 68 per cent over the last 12 months.

In April, Asia specialist First State Investments launched its first unit trust investing in the region: First State Latin America. Jonathan Asante, joint deputy head of global emerging market equities at First State, warns that Latin America’s stock markets could face a short-term correction. “Valuations for most decent growth companies are expensive in Brazil and full in Mexico, at best. If you are worried about losing money, now is not a good time to be investing in Latin America. Our fund has become increasingly cautious in the last six months.”

Asante says the region still has a number of structural deficiencies, including low savings, excessive government, and lack of competition. “Brazil and Mexico are still dependent on exporting commodities to China, and would be vulnerable if China tried to rebalance its economy away from state-sponsored capital spending. We have a large 25 per cent exposure to Chile, which we regard as the best run economy in Latin America.”

The Latin American carnival continues for now, just make sure you don’t end up with a mighty headache.