A Wonderful Story About Economic Growth
May 15th 2012 3:52PM
Updated May 16th 2012 2:48PM
Here's some advice for anyone fed up with the bad news from Europe. Take your globe, turn it upside-down, and then rotate it approximately 180 degrees in either direction.
Hopefully you're looking at South America -- if not, return the globe to its original position and repeat the exercise.
It's no secret that Latin America is outpacing the developed world in terms of economic growth. At the beginning of this month, my colleague Michael Lewis noted that: "Burgeoning middle classes in Brazil, Argentina, and Venezuela offer unprecedented opportunities for multinational companies."
While this is all fine and dandy, of course, the burning question for investors is: How do you profit from these fortuitous trends?
The twin tailwinds of growth
In its annual report, "Regional Economic Outlook: Western Hemisphere," (link opens PDF file) the International Monetary Fund attributes Latin America's recent success to the "twin tailwinds" of easy external financing and high commodity prices.
Since the onset of the financial crisis, and largely in the absence of a sufficient fiscal response, central banks in the developed world have adopted highly accommodative monetary policies. The Federal Reserve Bank of the United States alone has pumped more than $2 trillion of liquidity into the market since the failure of Lehman Brothers in 2008.
This has driven down yields in the developed world and sent capital cascading into emerging markets in search of higher returns. Brazil has even gone so far as to accuse the United States of intentionally manipulating the value of the dollar, much like China does with the yuan.
In addition to easy external financing, the region's commodity exporters are reaping enormous windfalls from the dramatic uptick in commodity prices. For instance, since 2000, the aggregate value of Brazil's exports have quadrupled, going from approximately $5 billion to $20 billion per month -- the country accounts for 25% of global raw cane and refined sugar exports, is the world leader in soybean exports, and is responsible for 80% of the planet's orange juice.
Although output in Latin America expanded at a slower rate in 2011 than the year before, 4.5% compared to 6.25%, it still far outshined growth in places like Europe, which barely notched a positive growth rate and has recently tipped into recession. And despite monetary tightening by the region's central banks, the IMF estimates that growth in Latin America will stay above 3% in 2012 and strengthen to about 4% the following year.
How to profit from Latin American growth
Speaking generally, there are two ways for investors to profit from Latin America's recent and anticipated good fortunes: the conservative way, and the not-so-conservative way.
The conservative way entails investing in North American companies with significant exposure to their southern neighbors.
As you can see in the table below, companies such as oil services contractor Schlumberger (NYS: SLB) and industrial conglomerate General Electric (NYS: GE) both have non-negligible presences there. And Ford (NYS: F) has even rolled out specific vehicle platforms that are available only in emerging markets, like the new Ford Ranger platform that purports to combine the "toughness and capability of a pickup with smart technology, outstanding safety, [and] excellent fuel economy," among other things.
Latin America Exposure
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|Johnson & Johnson||11%||$176||Add|
|Procter & Gamble||9%||$174||Add|
Source: All geographic sales figures are from the respective companies' annual or quarterly filings with the SEC. Market capitalization data are from Yahoo! Finance. Wal-Mart's unit count is used as a proxy for sales figures; only revenue from Schlumberger's oil services is included; Caterpillar's revenues from sales mining equipment excluded; and sales figures from Canada are included for 3M, Johnson & Johnson, and General Electric.
Alternatively, the non-conservative way entails a pure play on the region by investing in companies based exclusively in the Southwestern hemisphere. Two stocks that come to mind are Arcos Dorados (NYS: ARCO) and PriceSmart (NAS: PSMT) .
Arcos Dorados is the largest operator of McDonald's restaurants in Latin America and the world's largest McDonald's franchisee in terms of systemwide sales and number of restaurants. Despite a 17.7% year-over-year sales increase in 2011, however, shares in the company are down for the year, prompting my colleague Sean Williams to note that he couldn't "see how you can go wrong with these golden arches." Not to mention, Motley Fool Rising Stars Matthew Argersinger and Paul Chi list it as one of two emerging-market stocks to hold for 10 years.
PriceSmart is one of the largest operators of membership warehouse clubs in Latin America, serving more than 1 million customers at 29 locations principally throughout Central America. Think of it as the Costco of Latin America, though with significant room to grow, as it's currently a fraction of Costco's size. Although the stock trades for a far-from-cheap 36 times earnings, this metric alone shouldn't scare you away since there are plenty of reasons to take the PriceSmart plunge. Chief among them: The company can miss earnings expectations but still wow Wall Street -- a rare feat indeed.
Foolish bottom line
At the end of the day, whether you seriously consider any of these stocks is really beside the point. What I hope you take away instead is that all is not doom and gloom in the world. Yes, Europe is having its problems. And yes, the United States may still be slogging through its own malaise. But there are places that are experiencing the opposite, and it's only a matter of time before we do as well.
For a list of three American stocks that are dominating the world and making investors rich, click here now to view our free report revealing their identifies before the rest of the market catches on.
Editor's Note: A previous version of this article erroneously stated that PriceSmart is the largest membership warehouse operator in Latin America. That honor belongs to Wal-Mart. The Fool regrets the error.
At the time this article was published Motley Fool contributor John Maxfield does not have a financial position in any of the companies mentioned in this article. The Motley Fool owns shares of Arcos Dorados Holdings, PepsiCo, Ford Motor, Coca-Cola, and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of PepsiCo, 3M, Schlumberger, Procter & Gamble, PriceSmart, Arcos Dorados Holdings, Johnson & Johnson, Ford Motor, and Coca-Cola. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. Motley Fool newsletter services have recommended creating diagonal call positions in Wal-Mart Stores, Johnson & Johnson, PepsiCo, and 3M. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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