With exports to China and developed markets down, investors need to look closely at the macro environment in Latin America and position themselves for strength in domestic consumers.
While the slowdown in Brazil has taken the headlines lately, other countries in Latin America have seen their economies weaken as well. The Colombian central bank surprised markets last week with its first rate cut in two years as GDP growth slows from 6.0% to 4.7% this year. Weak industrial production and a stronger peso may be a sign of more weakness to come for companies in the Andean country.
Chile’s central bank president forecast an economic slowdown in the second half of the year as falling copper prices caused the country to post a trade deficit. While the country reported growth of 5.5% in the first half of the year, strong economic ties to China may hold back growth unless stimulus programs by the People’s Bank can spur demand for commodities. Interest rates will probably remain at 5.0% when Chile’s monetary authorities meet on August 16th, though the risk is clearly to a surprise cut to support growth. Slow consumer inflation, up just 2.7% year-over-year, should help support retail sales and domestic demand.
Despite a weak export environment, consumers in Latin America scored higher in a recent confidence survey by global data provider Nielsen. A secular increase in discretionary income through real wage gains and a decrease in unemployment through most of the region should support consumer goods in the face of global economic uncertainty.
Cencosud, one of the largest retail conglomerates in Latin America, is up 3.7% since trading began in its ADR shares in June. The $13.2 billion Chilean company operates stores in Argentina, Brazil, Chile and Peru. The company’s strong mix of retail segments and diverse geographic sales base should help it smooth out growth even if one segment or country experiences a downturn.
Compania Cervecerias Unidas produces, bottles and distributes alcoholic and non-alcoholic beverages in Chile and Argentina. The company reported August 3rd that its second quarter net profit increased by 11% to $23.4 million on higher volume, though sales were hurt by trucking strikes in Argentina. Revenue over the quarter also increased by 14% against the same quarter last year. Shares trade for 15 times trailing earnings and pay a 1.75% dividend yield.