Latin America: A Range of Opportunities for Active Investing

Acapulco, Mexico

2 Emerging Market Experts

MIRAE ASSET GLOBAL INVESTMENTS NEW CHINA: IMPACT OF THE CHINESE CONSUMER

As Latin America’s second-largest economy

and the US’ third-largest trading partner,2

Mexico offers an array of investment

opportunities. The country is currently

undergoing favorable economic reforms,

improving the labor market, as well as in the

telecom and energy sectors. Oil accounts for

around 20% of fiscal revenues and thus

remains an important part of the country’s

ability to grow. However, the energy reform,

which aims to privatize the oil sector, is

particularly attractive to investors who are

looking for direct exposure to the structural

benefits of Mexico’s equity market.

Economic growth is ticking up with real

gross domestic product (GDP) growth

projected to reach 2.8% for 2016, up from

2.5% the year before.3 This growth is largely

driven by the consumer who has been a

resilient, bright spot for the Mexican

economy. The domestic market is benefit-

ting from low inflation, low unemployment,

low interest rates and positive structural

reforms. Inflation, as measured by the

consumer price index (CPI), in Mexico

reached a low not seen in almost five

decades (chart 1). Inflation for 2015 was

2.7%, down from 4.0% the year before,

driven by falling prices for electricity, food,

and phone services. As inflation stays near

record lows, this translates to more spend-

ing money for the Mexican consumer.

Latin America: A Range of Opportunities for Active Investing

In 2016, Latin America roared back to become the best performing emerging market equity region with a return of 25.7% year-to-date through June 30.1 A year ago, it was one of the worst performing regions for equity investors. The Latin American region remains highly distinct with some countries experiencing economic growth while others are experiencing cyclical downturns that may soon see a revival as global growth and trade recover. Each of these countries offers a different set of investment opportunities, risks and challenges which is why active management is so important. This region has historically been sensitive to global growth and a potential recovery presents opportunities through highly discerning stock selection in these markets.

Here we take a close look at the two largest Latin American economies by GDP, Brazil and Mexico, and share our insights about how Mirae Asset invests in these countries.

1 MSCI.2 Office of the United States Trade Representative3 World Bank, Global Economic Prospects.

1966

1973

1980

1987

1994

2001

2008

2015

%

0

20

40

60

80

100

120

140

CPI (

annu

al)

Chart 1: Inflation in Mexico at Record Lows

Source: World Bank.

Mexico: A Confident Consumer

Emerging Market Experts 3

LATIN AMERICA

Alsea

Alsea is a Mexican multi-brand

restaurant operator that is

well-positioned to benefit from

increased discretionary spending

of the Mexican consumer. Alsea’s

net sales grew at a compounded

annual growth rate of 31.9%

from 2011 to 2015. Some of the

brands that Alsea operates in

Latin America include Burger

King, Domino’s and Starbucks.

Source: Alsea’s Annual Report 2015.This figure does not reflect a measure of performance for any mutual fund.

2011

2012

2013

2014

2015

0

10,000

20,000

30,000

40,000

Mex

ican

Pes

os (i

n m

illio

ns)

Alsea’s Net Sales

Unemployment in Mexico has also been

declining steadily (chart 2). Last year, Mexico

had one of the world’s lowest unemploy-

ment rates at 4.3%, compared to Germany

at 4.6%, the US at 5.3% and the European

Union at 9.4%.4 Mexico’s downward trend

of unemployment has continued into 2016,

falling to 3.7% in March, the lowest in

almost eight years.5 Another positive

employment factor is from remittances or

the transfer of money by a foreign worker to

a relative in his or her home country.

Remittances, the second-largest source of

foreign exchange for Mexico after exports

and an important source of revenue for

Mexican households, are also rising. In

2015, flows from remittances were higher

than oil exports, which reached $24.8 billion

(chart 3). Most of these remittances come

from the US and are another channel that

ties the US economic cycle to that of

Mexico and its consumers. We see the

employment growth as sustainable given

how competitive Mexico has become in a

global context and now offers global

companies an inexpensive back door entry

to the world’s largest market, the US.

The low unemployment rate, coupled with

low inflation, supports discretionary

consumer spending. In February of 2016,

Mexico’s year-over-year retail sales reached

a record high of 9.6%, up from 5.2% in

January.6 Consumer credit is also experienc-

2009

2010

2011

2012

2013

2014

2015

03/2

016*

Unem

ploy

men

t Rat

e

0

1

2

3

4

5

6%

Chart 2: Mexico’s Unemployment Rate Continues to Decline

Source: OECD, *Bloomberg.

2010

2011

2012

2013

2014

2015

US D

olla

r (in

bill

ions

)

19

20

21

22

23

24

25

26

Chart 3: Remittances into Mexico are Rising

Source: Banco de Mexico.

4 OECD.5 Bloomberg.6 Trading Economics, Instituto Nacional De Estadística y Geografía.

4 Emerging Market Experts

MIRAE ASSET GLOBAL INVESTMENTS

combined.8 Mexico is also a relatively young

country, with approximately 45% of its

population under 25 years old and an

average age of 27.3. Within the next 10 to

20 years, Mexico is expected to reach its

lowest total dependency ratio in a century.9

Mexico’s urbanized area has increased

significantly since 1940, with the urbaniza-

tion rate rising from 35% to over 77% in

2015.10 This large, young and urban group

of consumers, with increasing disposable

incomes, can have a considerable impact

on high-quality companies that cater to the

Mexican consumer.

LATIN AMERICA

Brazil, Latin America’s largest economy, has

been one of the best performing equity

markets in 2016, not only in Latin America,

but across the developed and emerging

market regions. In the first half of the year,

Brazil’s equity market returned an impressive

46.5%.11 This is made even more remark-

able given that Brazil’s equity market was

one of the worst performers of 2015,

declining more than 41% (chart 4).

Yet, despite the notable rebound of Brazil’s

equity market, led by a recovery in global

market expectations and a potential bottom-

ing out of commodity prices along with

optimism over potential market-friendly

policy reforms, the country remains very

Brazil: A Reversal of Fortune?Chart 4: Brazil has been a Standout Performer in 2016

Brazil

EM Latin America

Emerging Markets

-50 -40 -30 -20 -10 0 10 20 30 40 50%

2015 2016 YTD (6/30/16)

7 JP Morgan Latin America Equity Research, May 2016.8 Forbes.9 CELADE, The Latin American and Caribbean Demographic Centre.10 INEGI.11 MSCI.

ing healthy growth as consumer confidence

increases. Currently, credit penetration in

Mexico is low by both global and regional

standards, at around 17% of GDP versus

68% in Brazil and 125% in South Korea.7

This ability to increase leverage in the future

differentiates Mexico from many other

emerging markets and means that con-

sumption growth is still in its early stages.

Mexico is the 11th most populous country in

the world and with over 122 million people

has a potential consumer base as large as

those of Spain, France and Portugal

We see the employment

growth as sustainable

given how competitive

Mexico has become in

a global context.

Past Performance Does Not Guarantee Future Results.

Emerging Market Experts 5

LATIN AMERICA

fragile. Brazil is currently facing a host of

issues including political unrest involving the

country’s impeached President, an econom-

ic recession plagued by high unemployment

and high inflation, growing government debt

and sovereign rating downgrades to junk

status by major rating companies. Brazil’s

economy is expected to continue to

contract this year before returning to growth

in 2017 (chart 5). What’s needed now, in our

opinion, is for structural reforms to lead to a

period of sustainable growth by improving

business and consumer confidence which

has been at an all time low but is starting to

turn (chart 6). The political changes currently

occurring in Brazil could be the catalyst for

that. We expect reforms to help increase

investments and private spending, and

lower inflation which should lead to lower

interest rates and spur growth. The impact

of reforms cannot be underestimated in the

emerging markets and their effect on the

equity markets can be meaningful.

Despite Brazil’s near-term economic

difficulties, its equity market still offers

exciting investment ideas and access to

high-quality companies. Many companies

can still thrive even in a difficult economy

and we, as investors in the emerging

markets, see this as an opportunity to

increase our existing positions or as an entry

point to invest in structurally sound compa-

nies with strong management teams and

solid business models. As the country

undergoes potentially transformative reforms

and should confidence and growth return to

the economy, underpinned by a more

business friendly environment, these

companies are expected to benefit.

Chart 5: Brazil’s GDP Growth is Lower than the Rest of the Emerging Markets

2014

2015

2016

F20

17F

2018

F

%

-6

-4

-2

0

2

4

6

Real

GDP

Gro

wth

Brazil Emerging Markets

Source: World Bank, Global Economic Prospects, Jan 2016.

Chart 6: Brazil’s Business and Consumer Confidence are Heading in the Right Direction

2006

2008

2010

2012

2014

2016

60

70

80

90

100

110

120

Industrial Confidence Index

Optimism

Pessimism

Consumer Confidence Index

Source: Getulio Vargas Foundation (FGV), Credit Suisse.

MIRAE ASSET GLOBAL INVESTMENTS

RaiaDrogasil

RaiaDrogasil is Brazil’s largest

drugstore chain. The company

has demonstrated that a strong

business model can provide

growth even in a weak macro-

economic environment. Since

2005, RaiaDrogasil’s gross

revenues have grown more

than seven times.

RaiaDrogasil’s Gross Revenues

2005

2007

2009

2011

2013

2015

Braz

ilian

Rea

is (i

n bi

llion

s)

0

2,000

4,000

6,000

8,000

10,000

Source: RaiaDrogasil.

F=forecast. Forecasted numbers are projections and not guarantees.Past Performance Does Not Guarantee Future Results.

6 Emerging Market Experts

MIRAE ASSET GLOBAL INVESTMENTS LATIN AMERICA

12 World Bank, Global Economic Prospects 2016.

Other Emerging Latin America EconomiesIn Latin America, with all the attention

focused on Brazil and Mexico, it’s easy for

investors to forget that some of the most

interesting investment opportunities can be

found in the smaller markets of Peru,

Colombia and Chile. In Peru, the equity

market may have poor liquidity but market-

friendly reforms have made the country more

attractive to investors and its economy is

viewed as having the fastest growth potential

in Latin America. Meanwhile, Colombia is still

dealing with the fiscal constraints from

current oil prices but its economy, driven by

infrastructure spending, is expected to

expand by 3.0% in 2016, slightly better than

the world GDP growth of 2.9%.12 Chile

continues to struggle with low consumer and

business confidence but benefits from

economic and political stability. Despite

these headwinds, active equity investors can

still seek to uncover potential opportunities.

Active Investing in Latin AmericaLatin America is home to a diverse group of

countries with each economy moving in a

different direction and affected by different

macroeconomic issues. Mexico’s consumer

economy is showing resilience amid global

volatility while Brazil is facing near-term

economic challenges.

As an active, bottom-up investment

manager, Mirae Asset can analyze each

country and each individual company based

on its own set of circumstances. This allows

us to discover high-quality companies that

have the potential to outperform in the

long-term, even in a tumultuous economy,

and also seek to avoid risky companies with

weak fundamentals. The equity markets in

Latin America may be more susceptible to

cyclical swings so the need for an active

manager who understands these markets

becomes even more essential.

Emerging Market Experts 7

LATIN AMERICAThe views and information discussed in this brochure are subject to change and may not reflect the current views of the writer(s). The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such oes not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation.

Consumer Price Index (CPI) — measures changes in the price level of a market basket of consumer goods and services purchased by households.

Gross Domestic Product (GDP) — is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.

Past performance is no guarantee of future results.

Investment Risk — There can be no guarantee that any investment strategy (risk management or otherwise) will be successful. All investing involves risk, including the potential of loss of principal. Emerging Markets Risk — The risks of foreign investments are typically greater in less developed countries, which are sometimes referred to as emerging markets. For example, legal, political and economic structures in these countries may be changing rapidly, which can cause instability and greater risk of loss. These countries are also more likely to experience higher levels of inflation, deflation or currency devaluation, which could hurt their economies and securities markets. For these and other reasons, investments in emerging markets are often considered speculative. Similarly, investors are also subject to foreign securities risks including, but not limited to, the fact that foreign investments may be subject to different and in some circumstances less stringent regulatory and disclosure standards than US investments.

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