EDM Latin American Equity continues to shine given its attractive fundamentals
There is no doubt that 2018 was a bad year for equity markets, including those in Latin America. Nevertheless, the beginning of the year has been a stark contrast, with the region having closed a bullish January and a February in which there was some expected respite.
Why this turnaround or shift in trend relative to 2018? Our opinion is that the fundamentals of the companies in which we invest have not changed and remain positive. Therefore, there must be other variables and/or risks at play influencing the sentiment and behaviour of Latin American markets, including the following:
- The fact that US monetary policy has become more dovish implies that the central banks of Latin American countries are now under less pressure to raise rates.
- Trade tensions between the United States and the rest of the world have eased.
- On the political front, we weathered the main risks in 2018, centred in Brazil and Mexico as the region’s key economies.
- According to IMF forecasts, the GDP growth spread among emerging and developed countries is widening, in favour of the former where there is a slight acceleration in growth.
- After a fairly negative 2018, valuations cheapened significantly, which coupled with the confirmation of double-digit profit growth in 2018 and positive prospects for 2019, left attractive multiples relative to developed markets.
In addition to the foregoing, it is important to note that our investment philosophy, based exclusively on company fundamentals, has not changed at all. That is to say, regardless of what occurs on a macroeconomic or geopolitical level, regardless of volatility, EDM focuses solely on investing in a selection of interesting, financially sound, well-managed businesses with attractive valuations.
At the close of February 2019, our EDM Latin American Equity fund had accumulated a return of +10.12% in euros. Despite a good start to the year, we think our fund continues to maintain an attractive valuation and offers an interesting “expected return” relative to the “assumed risk.” It consists of 28 companies with quality businesses, from which we expect to obtain an aggregate profit growth rate above 13% in 2019. For the portfolio as a whole, the return on equity (ROE) is nearly 16% and its net debt/EBITDA ratio is less than 1x. In other words, these are growing businesses that are both profitable and financially sound.
In terms of valuation, the fund’s price multiple is 12.1x times the expected profits at the close of 2019 that, as we noted earlier, is the result of progressive cheapening over the last 14 months. Likewise, we expect an upside potential of approximately 20% to our estimated fair valuation.
In short, our EDM Latin American Equity fund offers an ample safety margin for investors who, thinking in the long term, want equity exposure in Latin America—which is one of the most economically dynamic regions at the moment, and is expected to remain so in the years to come—through a conservative selection of quality businesses.
Financial Analyst & Fund Manager