Considering their close ties with the U.S. economy, Latin America and Canada are holding up better than some investors might have expected...
Considering their close ties with the U.S. economy, Latin America and Canada are holding up better than some investors might have expected. That’s because each region is rich in commodities, a category that has been booming, says Standard & Poor’s international equity strategist Alec Young.
Canada’s stock market has about 35.8 percent exposure to materials and energy businesses, through stocks like energy companies EnCana (ECA) and Suncor Energy (SU), while Latin America has about 46.5 percent, through oil producers Petróleo Brasileiro (PBR) and miner Companhia Vale do Rio Doce (RIO). Young says this exposure will continue to drive earnings. Prices for many commodities, including gold, oil and wheat, touched all-time highs recently. “In our view, commodity-driven earnings-per-share momentum will continue to positively differentiate these markets in the months ahead,” Young says in his report.
Investors can play these regions through exchange-traded funds such as iShares S&P Latin America 40 Index (ILF) and iShares MSCI Canada Index (EWC), or mutual funds like Fidelity Canada (FICDX) and T. Rowe Price Latin America (PRLAX). But like the rest of the world, Canada has not proven immune to sluggish U.S. conditions. The International Monetary Fund on Monday said it expects Canada’s gross domestic product growth to slip to 1.8 percent in 2008 from 2.5 percent in 2007.
Citi Investment Research analyst Geoffrey Dennis, in a research note, says Latin America has performed better than any other region since global stock markets peaked in October, largely due to its commodities exposure. According to Morningstar, the average Latin American stock fund has 18 percent in energy and 25 percent in industrial materials.
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Morningstar senior analyst Bill Rocco says Latin American funds invest mostly in Mexico and Brazil. “Commodities are important to Latin American funds, primarily because they are important to Brazil,” he says, noting the purest way to play commodities is through a natural-resources fund. But Rocco warns that strong recent performance may not continue.