Latin American investing has always rewarded the contrarian thinker--2015 will prove no exception. The collapse of commodity prices and the corresponding dent in the region's currencies provides an attractive entree for value investors. The private equity industry, which excels at exploiting the volatile business cycles of Latin America, raised record funds in 2014 and is now scouring the region, especially Brazil, in search of distressed assets. U.S. strategic investors are historically timid about investing in a LatAm down-cycle. This time around, however, they might be more courageous. U.S. corporations are laden with cash and running out of cheap assets to buy stateside. U.S. firms long accustomed to operating in Latin America have learned the folly of retreat in a recession, and they have grown to depend upon the revenue contributions of their LatAm operations. Plenty of negative news will echo from South American economies this year. FDI may continue its decline from its peak in 2013. Experienced investors will not be deterred.
The most important obstacle to financial investors is also the least tangible: hubris. Latin America has a proud history of family-owned conglomerates, whose success can be attributed to a combination of grit, ingenuity, boldness, and well-crafted connections that enable them to operate with a degree of impunity. The omnipotence of large family-owned Latin American companies does not translate well into austere and simple formulas of a financial valuation. Pride gets in the way of a lot of acquisitions in the region. Thus, it helps when a market is in retreat and hubris is replaced by pragmatism. Compare the atmosphere in most boardrooms in Sao Paulo today versus 2011 and the contrast is palpable. The slowdowns in Chile, Brazil, Colombia and Peru have leveled the valuations of both publicly and privately held corporations, opening the door to investors.
Latin America has taken on historic debt levels, both at the consumer and corporate levels. Unsustainable consumer debt is now a drag on growth in Brazil and Chile and may soon begin to slow growth in Colombia. Latin American corporate debt issuance exceeded $180 billion in 2014, up 8 percent over 2013, a record year. Balance sheets remain healthy, but if interest rates rise sharply (as they could do in Brazil), then bankruptcies would grow, paving the way for consolidation...