Last man standing in LatAm: Sam Vecht says the tide is finally turning

Falling interest rates, a surge in nearshoring, and resilience amid ongoing tariff disputes have all helped power recent outperformance by BlackRock Latin American (BRLA ), the last remaining trust in the region, according to lead manager Sam Vecht.

Data from Deutsche Numis puts BRLA’s share price total return  at 30.9% year-to-date, comfortably ahead of the MSCI Latin America index, with gains of 21.9%. 

Since the Trump administration announced tariffs on 2 April, dubbed ‘Liberation Day’ by the US president, shares in the trust have risen 16.5% as they joined in the sharp recovery after the initial sell-off in global markets.

‘After a very long period out in the cold, we’re beginning to see the tide turn in terms of investor sentiment,’ said Vecht, who runs the trust with Gordon Fraser following the departure of former co-manager Christopher Brinkmann.

‘For the last 18 years, the majority of emerging markets have underperformed – really since 2007.’

He added that investors under the age of 42 have ‘never seen emerging markets outperform’.

Given the long-term underperformance, it is no surprise that there is a lack of demand for Latin America exposure, which has prompted at least a dozen trusts to wind down or exit the sector, leaving BRLA sole survivor.

Vecht said being the last-man standing ‘creates an opportunity in itself’ now the mood has changed.  

One key reason investors have to be optimistic about the sector right now, said Vecht, is that its the rate-hiking cycle in the region has likely peaked.

It is BRLA’s view that central banks in Brazil and Mexico, the largest economies in Latin America, should start cutting rates within the next 12 months, providing a boost to the region’s domestic businesses.

‘There’s a series of companies that are taking market share, growing in their niche and are able to exert pricing power that we’re positive about,’ he said.

‘If rates fall, that should provide an extra stimulus to help them grow.’

According to the latest factsheet, the trust’s biggest sector allocation is to consumer discretionary stocks, at 12.8% versus 1.5% for the benchmark. Among the top 10 holdings are Brazilian household appliance and electronics retailer Grupo Casas Bahia and leading fashion chain Lojas Renner.

The trust is also overweight Brazilian banks, which it expects to profit from improving credit conditions should interest rates fall to levels predicted.

Additionally, the manager expects Mexican companies to continue to profit from the post-pandemic trend in nearshoring that has seen the US outsource business processes to neighboring countries, particularly given the strain on the president’s relations with China.

BRLA’s 2024 outlook noted Mexico attracted $36.1bn in foreign direct investment (FDI) in 2023, over a third of which was accounted for by the US.

‘As long as the government continues to have policies that attract the right sort of investor and treat foreign investors sensibly, I think it’s a trend that’s likely to continue,’ Vecht said.

He added the region as a whole has ‘done better’ than other emerging market countries amid ‘the tariff wars’.

‘[BRLA] believes that Latin American markets will fare relatively better compared to much of the rest of the world under a Trump 2.0 tariff scenario, with much of the risk already priced in,’ he said.

‘This was evident on “Liberation Day”, where Latin American markets were generally more insulated from Trump’s broad-ranging tariffs.’ 

According to Vecht, Brazil got off lightly with only the baseline tariff rate of 10%, while threats of higher hikes for Mexico, which attracted significant headline attention, will probably not materialise give the two countries’ ‘interlinked supply chains’ and the leadership of Mexican president Claudia Sheinbaum, who ‘has proven to be a pragmatic and skilled negotiator.’

After Brazil and Mexico, the trust’s next biggest exposures are to Argentina, Chile and Peru, and Vecht has recently cut back on Columbia due to ‘fiscal uncertainty’.

BRLA closed yesterday on a 9.1% discount, which it is actively tackling via a buyback programme and performance-related tender offer.