Latin America is the Land of Opportunity
Hans is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Latin America is a region that is tremendously undervalued by investors. Brazil gets plenty of attention as one of the BRIC countries, but the rest continues to float under the radar.
I believe that this region is about to embark on an accelerated journey to prosperity. I do not just believe that because of numbers that I see, or news I read. It is due to what I have seen happening in the region with my own eyes over the last 10 years as I visited friends, family, and business associates. There is a tremendous amount of optimism underpinned by improved prosperity across all classes. Some countries, like Brazil, Colombia, and Chile, are further along the way than smaller Central American nations, but the progress can be seen and felt everywhere.
In the 1970s and early 1980s, just about the entire region was in deep, deep debt. Inflation was out of control. Currencies were devaluated. Almost half of the continent’s population lived in poverty. Funds were not available for social programs to pull people out of poverty.
Latin America’s economic growth has double compared to Europe and North America for half a decade now, throughout the global economic recovery. Latin America’s growth has only been roughly 50% of China’s and Eastern Asia’s expansion. There is a lot of room for more growth.
If Latin America continues its economic growth at 4% to 5% annually over the next 20 years, by 2030, 75% of its population will be considered middle class and the percentage of people living below the poverty level will drop from 32% to 10%, according to various multilateral institutions such as the World Bank.
That is a huge expansion of the region’s middle class.
- According to the 2012 United Nations estimates, Latin America counts for about 590 million people. 32%, or approximately 193 million, live in poverty. In other words, 400 million people are considered middle or upper class.
- By 2030, the United Nations estimates the Latin American population to grow to 700 million. If the economic growth continues to expand as predicted, in 2030 that middle and upper class in the region will have expanded to 630 million.
It is quite interesting to see that population growth in Latin America is actually slowing down. Studies suggest that improved prosperity has caused this decline. As a result, Latin America’s per capita income is forecasted to increase to $13,000 to $15,000 by 2030. That is about 50% higher than today.
Conclusion: Over the next 20 years there are going to be more people with more money to spend.
You could create infinite number of investment theories, mine is really simple. Call it a bet on common sense:
- You have a booming and prospering region with accelerating disposable income.
- Find businesses that are first movers and/or top dogs in their sector, which tap straight into that newly acquired and earned wealth.
- Select companies that are based on existing and proven business models and who are growing their earnings and revenues.
- Select companies with management who understand the complexities of doing business in Latin America.
- Mercadolibre (NASDAQ: MELI) – “The Ebay of Latin America,” with a little bit of Amazon flavor. Ebay tried to compete with them by expanding into Latin America. Ebay gave up, and is now invested in MELI. Enough said. There are some concerns that Amazon may hurt MELI as they have plans to enter into Brazil, MELI’s largest market. This does not concern me. Ebay and Amazon are doing both quite well in the US. I also think that Amazon will discover it is not that easy to do business in Latin America, as Ebay discovered itself.
- PriceSmart (NASDAQ: PSMT) – “The Costco of Latin America.” PSMT has only 30 stores in the region. They delivered another stellar quarter. What I like about PSMT is that they are building scale and first mover advantage in countries where Wal-Mart is not present. That means that they have delivering without accessing Brazil and without an aggressive push in Mexico.
Will all of this be a cakewalk? Not at all. There is significant risk involved. Success will be heavily influenced by continued macro-economic growth that must support further reduction in poverty. That means you have to be comfortable with a certain reliance on governments’ actions. For many that is a turn off, but I have time to ride it out.
I have high levels of confidence in the region. It has showed it can deliver and it has a blue print of how to be successful with Brazil leading the way. Over the past 20 years, major investments and commitments made by governments and the private sector have resulted in a poverty reduction from 48% to 32%. That is the biggest reason why Latin America has been prospering. I continue to monitor for certain trends that have been the foundation for that growth, including:
- A focus on improvement of healthcare, education services, crime reduction, broadband access, and housing solutions.
- Expansion of physical infrastructure to enable access to basic needs such as clean water, sanitation, reliable electricity services, road improvements, and in some countries effective and reliable mailing services.
- Solutions towards making more basic financial services available to people and small and medium enterprises to promote growth. Credit card fraud has to be resolved.
I am not saying this will be a smooth ride. I am saying that for those with patience, there is a lot of money to be made by investing in the right companies south of the border.
BEF1973 owns shares of MercadoLibre and PriceSmart. The Motley Fool owns shares of MercadoLibre. Motley Fool newsletter services recommend MercadoLibre and PriceSmart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.