Keep Your Eye on Latin American Investment Opportunities
Latin America is an emerging market with a burgeoning growth potential in investment. What does this mean, exactly? Well, first of all, let’s look at what the Gross Domestic Product, or GDP, is:
The GDP refers to the total value of goods and services that are produced within a country. It’s the primary measure of a country’s economic growth because it tells us whether the country’s economy is expanding or contracting. If the GDP is rising then the economy is in good shape, and of course, the opposite is true if the GDP is falling. When we talk about “growth potential,” we refer to a country’s (or company’s) ability to increase revenue (sales) and earnings (profit) over time, relative to the broader market.
GDP Growth in Certain Countries
For reference, here is GDP growth measured at 3Q2019 (the 3rd quarter of 2019) over a one year period:
- Brazil had GDP growth of 1.1%
- Costa Rica and Colombia had GDP growth of 2.6%
- Argentina had GDP reduction of -2.5%
- The United States’ GDP grew 2.9%
Emerging markets are often defined as an economy with low to middle per capita income, as is the current case with the markets in Latin America. It refers to a nation whose economy mimics that of a developed nation but does not fully meet the requirements to be classified as one. Luckily, with potential growth comes the possibility of a higher return on investment, or ROI.
Investments and ROI
An investment is defined as allocating your money towards something with the expectation that it will increase in value and generate a return. A “return” is formally called a return on investment (ROI), and measures the gain or loss generated on an investment compared to the amount of money invested. There are short-term investments, which are held for three to 12 months, and long-term investments, which are held greater than 1 year. A good investment occurs when you have made a return (made money) on the initial amount of money put into the investment; on the contrary, a poor investment means that you did not make a favorable return (lost money, or didn’t make money at the same rate as the market).
When investing, it is important to understand the market and decide where you can get the greatest return relative to the risk you are taking. And when evaluating potential future returns, the growth rate is a key ingredient in the analysis.
Currently, Latin America’s growth trends are steadily going up, which means it’s time to find a place to invest!
But where do you start?
Real Estate or The Stock Market?
The Stock Exchange or Bolsa de Valores is a marketplace for buying and selling bonds, shares, and securities. Stock exchanges act as a measure of national economic health and world economic strength. This is because a healthy and growing financial market directly equates to higher standards of living and job growth.
Real estate investment or Bienes Inmobiliarios/ Bienes Raices is the purchase, ownership, management, rental, and sale of property for profit. The most popular countries in Latin America for Americans buying real estate in 2018 were Chile, Colombia, Peru, and Mexico.
Latin America is still in the early stages of growth, and investors should take note! Based on the above research there is growth potential, and investing early when costs are lower could leave you with a larger gain and potential to grow your wealth.
Now, let’s review the biggest stock markets in Latin America.
The Big 3: Stock Exchanges in Latin America
Almost every country has its own stock market, however, three leading stock markets dominate Latin America’s trading activities. These profit giants are located in Brazil, Mexico, and Chile—known as the “Big 3.”
Brazil’s stock exchange is the largest in Latin America and a leading player in the global market. B3 ranks 16 out of the 20 major stock exchanges in the world and is the only Latin American exchange to make the Top 20 List, which is comprised of the biggest money-makers with the highest market capitalization (or “market cap”). Market cap is the market value of a publicly traded company’s outstanding shares.
Located in São Paulo, the B3 exchange has a USD $1 trillion-dollar-plus market cap as of 12/2018. (For comparison, the United States Dow Industrial Average has a USD $6.56 trillion dollar market cap as of 12/2018 and the New York Stock Exchange has a USD $22.9 trillion market cap as of 2/2019.
BMV was originally established in 1886 and was privately held before becoming a public company in 2008. It is the country’s only full-service securities exchange and the second-largest stock exchange in Latin America (after Brazil’s B3). In 3Q2019, the market cap was USD $416 billion. Some of the major companies also trade on the US stock market as American depositary receipts (ADR’s), making it easier for American investors to access foreign stocks since the ADR’s are traded in US dollars.
BIVA was created in 2018, thus growing options for investors. It is still a privately held company and thus the market cap is not made public. Both exchanges are located in Mexico City.
Located in Santiago, this is the third-largest stock exchange in Latin America. It trades stocks, bonds, investment funds, and derivatives as well as gold and silver Chilean coins. The market cap as of 3/2019 was USD $185.53 billion.
Gradual Market Expansion
In previous years, the Latin American market has shown slow economic growth, but the tide is gradually turning. According to an article from Barron’s, “Latin American economies are diversifying, the middle class is expanding, and consumption is rising within many nations. While…this evolution is slow and still in its early stages, it’s a thematic trend that can help improve economic stability and drive growth.”
High Demand for Real Estate
Investing in real estate proves profitable in areas where tourism and job growth are high. Densely-populated Latin American cities pose a challenge for developers who get creative with building vertically, such as high-rise apartment buildings and mixed-use spaces.
What is the driving force behind the increasing demand for housing? Several influencing factors include:
- Tourism is increasing in Colombia due to a reduction in crime and the discovery of beautiful beaches by the outside world.
- Brazil is seeing a rise in tourism since they dropped cumbersome visa requirements for countries such as the United States, Canada, Australia and Japan.
- Lima, Peru saw a doubling in housing prices between 2009-2013 as it became a popular destination for retired expats.
- Chile and Argentina have amazing ski resorts and tourists look for accommodations every winter (which is summertime in the United States).
- In Chile, foreign investors are entitled to the benefits of native citizens without becoming residents themselves.
Bigger Bang for Your Buck
Latin America is also attractive to foreign investors because your money goes further. There is a lower cost of living and lower wages than the United States, which means you get more bang for your buck and have access to affordable hired help (i.e. house cleaning, child care).
Risks and Benefits
Latin America, as an emerging market, has higher inherent risks, like market risk, currency risk, possible elevated fees, and a potentially volatile political climate. Despite the risks, however, the benefits are very attractive: less stringent tax requirements, asset diversification, and exchange rate advantages.
Buying real estate or allocating a portion of your portfolio towards stocks in Brazil, Mexico, Chile, or other Latin American stock exchanges is a smart way to diversify.
The Bottom Line
Keep your eye on Latin America and don’t overlook possible investment opportunities today and on the horizon. Increase your regional knowledge by signing up for a free class at Homeschool Spanish Academy ahorita!
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