Minimize Risk When Investing in Latin America

In past commentaries, I discussed the need for geographical diversification to helped aid and mix up portfolio returns. Investing in foreign stocks can also help to minimize currency risk. I wrote about looking at hot stock markets in Asia such as India, Jakarta, and Korea along with Mexico, and the renewed strength in Japan stocks

 In Latin America, because of its close proximity and trading with the United States, there is good potential for the risk investor. Besides Mexico, we have seen some superlative gains in Brazil as Sao Paulo Stock Exchange’s Bovespa index recently traded at an all-time high of 41,693, up over 75% from its 52-week low. Compare this to the returns you are getting in U.S. markets and you should clearly understand the need to diversify your assets.

 In Brazil, the country is experiencing improving economic fundamentals and a high benchmark interest rate that is presently at an astounding 15.75%. This high rate creates a high interest rate differential between Brazilian assets and what you can earn elsewhere, so it attracts foreign capital, which has helped prop up Brazil. But, while the rate is high, there is a reason for it. Brazil comprises much higher investment risk that investing in U.S. or Canadian securities.

 The country, under Portuguese rule for three centuries, became an independent country in 1882 and a republic in 1889, and has developed into the dominant economic power in South America. Good agricultural, mining, manufacturing, and service sectors drive the Brazilian economy. But, the country is vulnerable. In 2001 and 2002, the Brazilian Real collapsed, but since then the country has restructured its financial system and recorded record trade surpluses in the period from 2003-2005.

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 And while the situation has improved, there remain risks to investing in Brazil. The government’s domestic and foreign debt is large and poses a threat to the financial structure. Income inequality is also a problem hindering Brazil. If you want to invest in Brazil or any other Latin America country, you may want to do so via mutual funds or ETFs to help minimize the risk.