Michael Molinski is a veteran business reporter and the author of Investing in Latin America: Best Stocks, Best Funds. As our Motley Fool Global Gains team prepares for a research trip to this rapidly growing region, we thought it'd be interesting to sit down with Molinski to find out what he's thinking today.
Tim Hanson: Michael, thanks very much for joining me today. Over the past year, Latin American markets have substantially outperformed our own. Giants such as Petrobras
Michael Molinski: It's no secret that Latin American markets have performed extremely well. And there are two main reasons why people should invest: diversity and opportunity.
Hanson: I see.
Molinski: In terms of the diversity, one of the main reasons you want to invest in Latin America is that it has low correlation with the U.S. market, meaning when the U.S. market goes up, Latin America may go down.
Molinski: And that is a good thing, especially as correlation between major developed countries has increased.
Hanson: So what you get from Europe ...
Molinski: It isn't near as good as what you get if you invest in Latin America.
Molinski: The other main reason is opportunity.
Hanson: Now, how are the valuations?
Molinski: It is a risky area to invest in. Amateur investors should not be buying equities in Latin America. If you do buy individual equities in Latin America, the only way to do it is to make sure you have a diversified portfolio of them, that you keep constant tabs, and that you really know what you are doing.
Hanson: So what should small investors do?
Molinski: Small investors, if you are going to invest in Latin America, don't do it yourself. Get a mutual fund or get an ETF, and let the experts do it. It is actually a region where I personally think that actively managed funds are appropriate, because discerning stock picking is important.
Hanson: Now, you said that there is some risk in Latin America, and I think people are aware that a lot of that is political -- Hugo Chavez, obviously, in Venezuela. And even Brazil and Argentina have governments that like to interfere in the economy. Is that the main risk?
Molinski: Basically, every risk that could come up exists down there, though it is not as risky as it used to be. The people of Latin America have embraced much more of global macroeconomic policy than they used to. The governments have done that as well. Just to give you an example, I knew President Lula of Brazil back when he was a labor leader.
Molinski: He was an extremist. He was very left-wing.
Hanson: Fiery, yeah.
Molinski: Look at him now. He has just streamlined the economy, implemented a lot of really sound macroeconomic policies, and run the country really well.
Hanson: You know, one of the funny things that has always struck me about Brazil is that if I got to play God for a moment, if you were to come to me and say, "Design the country that has the most opportunity to just be an economic superpower," I think that country would look a lot like Brazil. It has so many natural resources, such a long coastline, so many people. Yet for so long, the country struggled or was volatile.
Molinski: That's right. The potential of Brazil is just enormous, and we have seen that over the past year. The country has so many commodities. So as global demand for those commodities shoots up, especially in China, Brazil gets lifted.
Hanson: Yes, Petrobras has been unbelievable.
Molinski: Exactly. I have always been a big fan of Brazil. It has a lot of long-term potential. Now, one of the things to look at with a country like Brazil, and in Latin America in general, is that when there is a lot of news, big global news coming out of the U.S. and elsewhere, Brazil and the rest of Latin America are dependent on that news. So for example, if there is a big change in interest-rate policy in America, that is going to have a dramatic effect on Brazil, and it is going to drive the markets.
But when there is not big news happening globally, then the news that drives the Brazilian market is local news -- particularly since the vast majority of Brazilian shares are held by Brazilians. So when there is not major news happening globally, it is the Brazilian investors who run the market. If you don't know what is happening there and keep constant tabs on it, you are not going to be an effective investor.
Hanson: One of the interesting things about the correlation between the American markets and the Brazilian markets and one of the things we laugh about here is Embraer
Molinski: There is not an understanding of the market; you are absolutely right. And that is one of the big risks of investing in Brazil -- that things are going to get beaten down for reasons that have nothing to do with the health of the company or even the health of the Brazilian economy.
Having said that, there are some advantages for small investors in Latin America. Most large investors shy away from Latin America, specifically because of those risks and because of the low liquidity. So it does give an opportunity for a savvy, information-rich investor to actually go down there and find something, look under rocks and ...
Hanson: Make some money.
Molinski: Yeah, exactly. People like Burton Malkiel have argued for years that all the information available on a stock at any given time is pretty much embedded in the price. All the information is not out there on some Latin American stocks.
Hanson: Or if it is out there, no one is reading it.
Molinski: Right, that, too.
Hanson: We just had a meeting the other day with Ron Muhlenkamp, who runs a fund out of Pittsburgh, and he was making the point to us that the only risk that you now get paid to take in investing is volatility. Everything else is accounted for and efficient, as you said. Currency risk is priced in, business risk is; but volatility is still the one risk you can get paid to take.
Molinski: Yup, I would agree with that.
Hanson: In a place like Brazil, if you are willing to hold for five, six more years, that is a risk that can pay off for you, I would think.
Molinski: Yes, but again, there are a number of risks in Brazil, all of which you have got to take into account. But long term, Latin America has improved dramatically over the past 10 years, and I think that is a trend that is going to continue. No one has a crystal ball. No one knows what is going to happen. It is becoming less risky overall, little by little, and that is statistically a fact, and I think that will continue, and I think there will always be good opportunities.
Hanson: So a little bit of volatility in the short term, or a lot of volatility in the short term, but a promising long-term picture for people who have the time and interest to get invested -- and if they don't, then look at some actively managed funds that are going to take the time and make smart decisions for you.
The Motley Fool Global Gains research team leaves for Latin America in little more than a week to help you learn more about Latin America's promising investment opportunities. Sign up to receive our dispatches, updates, and stock ideas live from the field by providing your email address in the field below.
Tim Hanson does not own shares of any company mentioned. Petrobras and Bank of America are Motley Fool Income Investor recommendations. Embraer is a Stock Advisor pick. The Motley Fool has a disclosure policy.