Latin America has long been a region of untapped potential, stuck in what economists call the "middle income trap." This phenomenon occurs when a country's growth stagnates after reaching a certain level of per capita income, unable to transition to a high-income economy. In this week’s conversation with Tassos Stassopoulos of Trinetra Investment Management, we discuss the recent developments that suggest that Latin America might be on the cusp of breaking free from this trap, presenting an attractive opportunity for global investors seeking diversification in an increasingly multipolar world.

One key factor that could propel Latin America's escape from the middle income trap is the rise of companies actively working to help people transition from the informal to the formal economy. The COVID-19 pandemic and the growing trend of near-shoring have acted as catalysts for change, encouraging businesses to invest in the region and create more stable, formal employment opportunities. As a result, a larger portion of the population could see improved social security and a better quality of life, driving economic growth and development.

Twice bitten and sceptical investors are starting to take notice of Latin America's potential and the potential for sustainable change, with many already moving to overweight countries like Mexico and Brazil. The region's attractiveness relative to developed world equities stems from several factors, including decreasing interest rates, which are expected to stimulate consumption and economic growth. Additionally, near-shoring from both US and Chinese companies is injecting foreign investment into the region, creating jobs and boosting productivity.

Latin America also offers global investors the opportunity to diversify their portfolios, particularly in a world where geopolitical tensions between major powers are on the rise. As countries in the region navigate relationships with both the United States and China, they may benefit from increased investment and trade opportunities. This unique position could help Latin American economies grow and become more resilient, making them an appealing option for investors looking to spread their risk.

Moreover, the region is home to a number of attractive investment opportunities across various sectors. For example, in this video Tassos explains why Raia Drogasil, Brazil's largest pharmacy chain, has consistently delivered strong performance and is well-positioned to benefit from the country's ageing population and growing demand for healthcare products. Another example discussed is Gentera, a Mexican microfinance company that is helping to empower women and support entrepreneurship in the informal economy. As these companies grow and succeed, they contribute to the overall economic development of the region.

However, investing in Latin America is not without its challenges. The region still faces issues such as political instability, regulatory hurdles, and market volatility. As such, we think it is still an area where you have to be discerning and invest with your eyes open. In that sense active management may make sense providing the manager can show a deep understanding of the local market dynamics.

In summary, Trinetra are of the view that Latin America stands at a critical juncture, with the potential to break free from the middle income trap and emerge as a compelling investment destination for global investors. The region's unique position in a multipolar world, coupled with the rise of companies driving formalisation and the availability of attractive investment opportunities, make it an increasingly appealing option for portfolio diversification. We think that the starting valuations are now pretty compelling and if confidence amongst institutional investors improves successful stocks may also find themselves with a powerful re-rating tailwind as well as higher earnings growth than we can reasonably expect in the West.

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