The reality is that the region was able to prove its resilience during the heights of the crisis, showing that years of macroeconomic reforms left the region with a strong fiscal position, disciplined monetary policy, high levels of liquidity and strong corporate and banking sectors.

We believe Brazil offers the combination of a strong top-down story with some of the most attractive equity valuations among major emerging markets. Brazil continues to trade in the bottom half of global valuations at around 10x 2011e P/E with over 20 per cent earnings growth expected. We believe Brazil’s growing middle class, the unmet pent-up demand in the areas of credit and housing and the continued availability and affordability of credit should continue to fuel the already strong domestic economy. Brazil’s Central Bank slowed the pace of its tightening cycle during July which seems to indicate we are close to the end of this tightening cycle. We remain confident that this tightening cycle will bring Brazil’s GDP growth rate back to trend (-5 per cent) and inflation back to target of 4.5 per cent for next year and that it will not derail the positive domestic growth story we continue to see in the country. 

Global cyclical stories like Vale continue to look attractive to us due to a tight iron market.  Petrobras announced one of the largest capital expenditure programmes in the world ($225 billion over five years), with the goal of doubling Brazil’s oil production in the next decade. World Cup 2014 and the Rio Olympics in 2016 will also add to Brazil’s focus on infrastructure improvements, all of which add to economic growth.  Finally, we don’t expect October elections to result in significant changes to Brazil's economic policies, thus leading to a continuation of the same economic programme started in 1994.

The Mexican story is less interesting given that the country’s growth is closely tied to economic activity in the US. Mexico’s equity market looks fully priced trading at 13.5x 2011e P/E. President Calderon looks unlikely to be able to pass needed reforms in the last two years of his presidency that would allow the country to grow at a faster pace. The opposition party PRI took control of the lower house in 2009 and now seems intent on positioning itself to take over the presidency in 2012. Also, security concerns seem to be delaying investments by several corporations, hurting overall economic activity especially in the country’s northern states.

Chile has an attractive macro story but unattractive equity valuations. The earthquake there in March focused the Piniera administration on rebuilding the affected areas, thus leaving reforms for later in his presidency.  The economy seems to be on its way to meeting the president’s goal of 6 per cent per annum GDP growth.  Peru is one of the more attractive smaller markets in the region and it’s currently undergoing significant infrastructure investment. Peru had been growing at Asian-like high single digits for many years up to the financial crisis, and seems bound to return to such levels in 2010 and beyond.  In Colombia, President-elect Santos should ensure the continuity of President Uribe’s last eight years in office, creating an attractive backdrop for economic growth. Argentina and Venezuela are large economies with populist presidents which deter investments in their countries.

The largest risks to economic growth in Latin America stem mostly from outside forces - a deepening of the eurozone debt crisis, a double-dip in the US economy, China overdoing its efforts to slow down its economy - any of which would most likely result in falling investor risk appetite and lower demand for Latin American equities. Locally, we are confident regarding most central banks' commitments with inflation targeting and don't expect the current election cycle to shift the direction of the main economies we are investing in, but need to keep a close eye on both as a change in direction would impact our positive views regarding the region's domestic economies.