Stretching from the US-Mexico border to the southernmost tip of South America, Latin America's rich geographical landscape means that it is a strong player in a variety of economic sectors. But investors should also be aware of the region's challenges. Esteban Polidura, a member of our Investment Solutions, Latin America team, highlights some of the opportunities – and potential pitfalls – associated with investing in Latin America.
Cultural and geographic diversity
Latin America is a great region, and I mean that literally. Latin America accounts for about 13 per cent of the Earth’s land surface. That means that the region offers great geographic and biological diversity. This means copper mines, silver mines, lithium mines, but also of course oil fields, and plenty of land for agriculture and cattle raising. All of this allows Latin America to be a strong player in these industries. In addition, its proximity to the US, also allows Latin America to be active in the manufacturing sector.
Latin America is also the home to approximately 650 million people. This population is spread around 20 countries. Combined, they produce some USD 6 trillion in economic value, making Latin America the third largest economy in the world, behind the US and China.
In addition, Latin America is also the combination of a very interesting cultural heritage. This includes not only the indigenous civilizations such as the Aztecs, the Mayas, the Incas, but also the Western civilisation: Spanish, Portuguese and French. This allows Latin America to have a very interesting story that not all countries can share with the rest of the world.
Latin America produces some USD 6 trillion in economic value, making it the third largest economy in the world.
Investors who wish to allocate their resources to Latin America should be aware of several things. First, the region is very diversified in terms of political agendas and political strategies.
Second, different countries have different exposures to currencies, and investors need to be aware that the exposure they have in one country will be very different to the exposure they have in another country vis-à-vis the US dollar.
Finally, even finances between some of these countries have very different characteristics. Some of the countries in Latin America have a lot of leverage, but leverage in other currencies than their own currency.
Latin America’s main challenge is achieving its full growth potential. So far, Latin America has been growing along with its peers, but it has plenty of room to grow more – and to grow faster. There is a good opportunity to generate a business-friendly environment and to achieve that, local governments have to apply checks and balances so that the rule of law is obeyed. They will also have to attract foreign direct investment and foster local investments and domestic consumption going forward.
Several Latin American countries rank among the highest in terms of work hours spent, but unfortunately these countries rank among the lowest in terms of salaries paid. That implies that there is a very interesting opportunity to increase not only the education of its people, but also the productivity of its people.
Clearly, education in Latin America needs to be targeting value added jobs – not only simple manufacturing – but jobs where really the person can really add value. Our research team has provided some numbers on the education market going forward, and it is very interesting because it implies around USD 10 trillion of potential value by 2030.
Solar and wind energy have plenty of room to grow if local governments allow for private investments to flow into these industries.
Today Latin America is ahead of its peers with respect to the use of clean energy. Some 50 per cent of the electricity needs in Latin America are provided by hydropower, but energy such as solar and wind is not used as it should be. So if we consider Latin America’s geographic characteristics, that implies that both solar and wind energy have plenty of room to grow if local governments allow for private investments to flow into these industries.
Latin America is one of the most urbanised regions in the world. Some 80 per cent of Latin Americans live in cities, and of course, this generates problems. In the future Latin America, as many other cities in the world, will have to compete to gain the most educated people, the most productive people, and that means offering not only mobility, but also an environment of low pollution, low noise and a welcoming environment for future generations.