Brazil is pick of bunch in Latin American gold rush

Global equity markets have been volatile in recent months with investors becoming more risk averse as a result of Euroland's debt problems. Leading global equity indices have moved lower but, as a result, an investment opportunity may have presented itself.

Scottish football has enjoyed a bitter-sweet relationship with Latin America, exemplified by the 1978 finals in Argentina, where humiliation at the hands of unfancied Peru in our opening match was redeemed eight days later by a famous 3-2 victory over the Netherlands, although the margin was insufficient to take Scotland through.

For investors with funds to invest, Latin America could provide a rich seam of growth without the dangers of a Peru-type disaster, especially as it is possibly one of the regions that will perform particularly well on the back of long-term global economic growth.

And "seam" is the operative word as Latin America's exports include gold, forestry, coffee and soya beans, copper, zinc, iron and oil. However, as the local economies develop, domestic consumption will become increasingly important.

Unlike the Eurozone, Latin American economies have retained fairly strict fiscal policies and this has boosted wealth (and personal incomes) over the past ten years. Brazil, the biggest country, last had a currency crisis in 1999 but since then has produced average annual growth of 5 per cent over the period and is anticipated to overtake Britain and France in terms of wealth in a few years' time. The growth rate for the region in 2010 is set to average 4.5 per cent.

Latin America also boasts low levels of public debt compared with Eurozone countries, while the level of external debt is much lower. The figures speak for themselves; in 2009 the public debt of Greece was circa 115 per cent of GDP, while Italy's was even more. This compares with around 50 per cent for Argentina, 40 per cent for Brazil and under 10 per cent for Chile. Foreign exchange reserves have increased significantly in recent years, providing local economies with a degree of "insurance" against external economic shocks. In addition, the banking sector has fared far better than many of its Western counterparts as Latin banks are typically well regulated and capitalised.

Therefore, with Europe's first priority to get back to where it was, far less move forward, Latin America could provide investors with a growth opportunity in an environment not mired in the problems which have caused the recent correction in global equity markets.

UK-based investors looking for exposure to Latin American equity markets only have a limited range of UK domiciled funds to choose from. Threadneedle Asset Management launched its fund in November 1997. It is the largest in the sector with assets in excess of 1billion. A new fund manager, Julian Thompson, was appointed in April 2009 and the fund has made good progress over the past year.

Invesco Perpetual also has a long track record of investing in the region. Dean Newman, the primary fund manager, has been there since the November 1994 launch. Again, the fund is a decent size with assets in excess of 380 million and the performance over the past year has been excellent. In the Investment Trust Sector there is only one fund, the Blackrock Latin American Investment Trust, focused on the region. It is also possible for investors to obtain exposure to Latin American Equity Markets via Exchange Traded Funds provided by db x-trackers, ishares and Lyxor.

One important reason why Latin America offers such positive long-term prospects is that it is expected to benefit from the anticipated recovery in world markets as demand for raw materials grows.

For investors, Brazil and Mexico dominate Latin America. Mexico's economic prospects are largely tied in with those of its larger neighbour to the north with 80 per cent of exports heading to the US. And Mexico could soon feel the benefits if America, first into recession, is first out.

Brazil's impressive growth record has been focused on the two main cities of Rio de Janeiro and So Paulo; now sights are being set on the northern, central and southern hinterlands, all relatively unexploited.

On the other side of the Andes, analysts believe that the natural wealth of both Peru – Scottish international football's bte noire – and Columbia have the potential to provide appreciable returns. Although perhaps a more mature economy, Chile is expected to increase its public debt this year and next but only to finance repairs to coastal regions affected by last winter's earthquake. By all accounts, revenue from Chile's state-owned copper mines has been used wisely. Venezuela is certainly not closed for business but the policies implemented by president Hugo Chvez are a major concern.

On the whole, investors, whose awareness of Latin America's rich potential is tempered by concern about local attitudes to corporate governance and social stability, should delve a little deeper. The "military coup" seems to be ingrained in Western thinking about this particular part of the world yet, over the past 25 years, changes of government have largely been a peaceful process while corporate governance standards have improved significantly.

Investors in emerging markets have tended to focus on "generalist" global funds but, when specialising, have really only targeted China and India. Julian Thompson recently highlighted that the Brazilian market was trading at around 10x forward earnings while for China and India the numbers are 12x and 15x respectively.

Clearly, there are risks associated with investment in Latin American equities, the most significant being if the recovery in global economic activity stalls. However, if you believe that this will not occur then investing in Latin American equities now, after they have been marked lower due to the problems emanating from Europe, could be a rewarding decision over the longer term.

Charles Robertson is senior investment manager at Murray Asset Management.