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Michael Molinski's Emerging Latin America Archives | Email alerts
Nov. 28, 2011, 12:01 a.m. EST
By Michael Molinski
SAN FRANCISCO (MarketWatch) "” The commodities boom is over in Latin America, so what's next?
By "over," I don't necessarily mean that there's less demand for commodities. But as an investment, commodities don't present the opportunities they did over the past decade.
For an early glance at the future, one only has to look at sales of Caterpillar /quotes/zigman/221644/quotes/nls/cat CAT +5.44% , the heavy machinery maker. Caterpillar's sales to Latin America, which are mostly for mining and construction, grew 16% in October from a year ago, after growing 33% in September and 43% in August. That's the company's sharpest slowdown in regional growth worldwide, and indicates that companies that produce, mine and farm commodities are spending less.
If investors are looking for the next big thing to come out of Latin America, they should pay attention to what is happening to the middle class in the region.
For the first time in decades, it's growing! The middle class in Latin America has grown to 51% of the major economies in 2011, from just 41% in 2001, according to a report by Banco Santander. That growth in the middle class has pushed per capita income to $11,900 from $7,600 in the past decade. Why has the middle-class grown? In part, it's because the middle class has reaped the benefits of the commodities boom, just as investors have. Social policies in many countries, such as in Brazil, have helped the middle class retain those assets.
How then can investors profit from the surge in the middle class? Copper miners in Peru like Compania de Minas Buenaventure SAA /quotes/zigman/160636/quotes/nls/bvn BVN -2.10% , or Brazil's Vale SA /quotes/zigman/553117/quotes/nls/vale VALE +3.33% or Petrobras /quotes/zigman/265276/quotes/nls/pbr PBR +4.28% may not be the leaders over the next decade. Instead, the leaders may well be from consumer-driven companies that cater to the middle class, like consumer discretionary and consumer staples, or media, or wireless communications, or real estate.
These companies have money, and they are spending it now on growth and acquisitions.
Retailers, for example, have been busy all year trying to gain and grow through consolidating. In Brazil, Companhia Brasileira de Distribuicao Pao de Acucar /quotes/zigman/157385/quotes/nls/cbd CBD +4.04% gobbled up Globex, which controls appliance retailers Ponto Frio and Casas Bahia. And in Colombia, retail chain Almacenes Exito SA /quotes/zigman/1469650 CO:EXITO +0.59% "” which is part-owned by France's Casino /quotes/zigman/164744 FR:CO +5.87% "” sold $1.3 billion shares on the local market as it expands into Uruguay and other countries.
What these companies and others like them are counting on, aside from the growth of the middle class, is that people will spend more and will change their shopping habits as they reach the middle class. For example, 58% of Brazilians still use cash at supermarkets, with just 15% of purchases coming from credit cards and another 15% from debit cards. Grocers like Pao de Acucar are hoping that will flip as more middle-class Brazilians gain access to banking. CBD's capital spending has grown by 13.89% over the last five years, vs. an industry average of 2.11%. The company's earnings per share is projected by analysts to grow by 26.44% over the next five years.
Another good way to tap the growth in the middle class is through investments in wireless communications. America Movil /quotes/zigman/276628/quotes/nls/amx AMX +2.75% , which is based in Mexico but has holdings throughout Latin America, currently trades at around $23 a share, which is well below its 52-week-high of $29.81. It also has an operating margin of 22%, which is well above the industry average of 9%. And, it's part of billionaire Carlos Slim's group of companies, which means it has the reputation of managing its assets efficiently and has the staying power of a brand name.
Shopping malls are another way of tapping the middle class. Sam Lieber, founder and CEO of Alpine Woods Capital Investors, told Barron's in a recent interview that shopping malls are a good way to capture the growth in rising incomes. He suggested Mutliplan /quotes/zigman/1507568 BR:MULT3 +1.47% and Iguatemi /quotes/zigman/1503717 BR:IGTA3 +5.70% as well-run developers of shopping malls. Both have cash-flow growth of 25% a year.
Media companies may also be a good buy in Latin America, especially if investors are selective. While many media companies have struggled in the United States and other developed countries, those that shine have capitalized on their core content and are finding new ways of distributing that content. TV Azteca, for example, has a firm grasp on the growing middle class of Latin America and has been successful in both finding new ways of distributing its content and in finding new markets for its content.
Finally, beverage makers continue to be a good way to tap economic growth in the region and, by consequence, the growth in the middle class. Companhia de Bebidas das Americas /quotes/zigman/266558/quotes/nls/abv ABV +2.51% is one of the best-run companies in the region and one of the largest. It has the added value of being a good recession-proof investment, and its growth in earnings per share of 24% trumps the industry average.
Michael Molinski is the author of "Investing in Latin America: Best Stocks, Best Funds" and is a founding partner of Investing Across Borders, a San Francisco-based research firm (www.investingacrossborders.com)
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