November 2024
To know South and Central America is to embrace its standing as a raw materials supplier to the world.
Benefiting from abundant sources of minerals and oil, as well as large tracts of fertile land, Latin America’s fortunes have long been tied to the global commodity markets.
For example, the region produces 50% of the world’s silver, 40% of its copper, 34% of its lithium, and more than 20% of its tin and zinc, according to the International Energy Agency. Plus, it produces 13% of the world’s agricultural and fish commodities, according to the Organization for Economic Co-operation and Development (OECD).
But to merely view—and invest in—South and Central America through a commodity lens shortchanges the potential across the region.
Especially as opportunities in sectors such as financials, information technology, and the consumer are thriving.
A Well-Grounded Foundation
To be clear, commodities represent a significant portion of national GDPs across South and Central America and will remain a leading driver of those economies over the next couple of decades or so.
For example, Chile is the world’s largest copper producer and economic activity related to mining and exporting the metal is a significant contributor to the industrial sector, which accounts for roughly a quarter of the nation’s GDP, according to the OECD.
In Brazil, industrial activity accounts for nearly 20% of the nation’s GDP, bolstered by its prominence in the global iron ore, aluminum, and coal markets, according to OECD data. The agricultural sector also represents about 6% of Brazil’s economy, although goods such as coffee, sugar cane, oranges, livestock, and timber help the sector account for 49% of its exports, according to the government.
In Colombia, crude oil, coal, and coffee are leading commodity exports and contribute significantly to the country’s GDP: the industrial sector represents 20% of the economy and the agricultural sector contributes 6%, according to OECD data.
Oil is also poised to further lift Brazil’s economy, which is ninth largest in the world, due to recent discoveries of significant offshore oil reserves.
Of late, lithium has attracted much attention, but the impact of the chemical element seems less assured, especially in the near term. Chile and Bolivia have large reserves of the mineral, which is a key component to batteries in electric vehicles (EV). Lithium prices jumped alongside enthusiasm over EV market growth through much of 2021-22, but have tumbled since early 2023, according to the International Energy Agency.
As consumers balked at the high prices on EVs, investors realized the changeover to EVs would be a much slower process than initially believed. We believe there’s still potential in the EV market—and, by extension, lithium mining—but the region must wait and see how things develop.
Financial Sector Gaining Prominence
Over-reliance on commodity markets, however, is precarious.
Prices can swing dramatically in both directions as demand is susceptible to economic conditions in faraway lands and global financial dynamics. Similarly, supply fundamentals are vulnerable to extreme acts of nature and political whims.
Recognizing that a diversified economy is a healthier economy, leaders across Latin America have been building out capacity in many other sectors.
Take, for example, the financial services sector.
Financial firms across South and Central America were long known for tradition-bound institutions that had poor service, due in part to little competition. They also invested little in their business infrastructure.
That changed with the recent rise of online banking and other services. Offering streamlined services with quick answers and no paperwork, upstart firms started gathering assets and accelerating the rate of bankization among previously unbanked individuals across the region.
In turn, the industry leaders have been investing in technology to prove they can keep up and maintain their market-leading presence.
While the competition has sharpened, the broader appeal to industry newcomers has created high growth potential for investors in the financial sector.
Digitization Movement Broad Based
At the core of the financial system upgrade is technology (fintech) that broadens the capabilities and capacity of industry providers, which first proved valuable during the pandemic when people were homebound but had to make and receive payments.
Similar technological advances have evolved in the healthcare and consumer sectors, where people changed how they connected with doctors and shopped during the pandemic and have appreciated the accessibility and ease ever since. Especially within the younger demographic that grew up with smartphones.
Previously, investment in information technology was modest at best across all sectors in Latin America.
Today, as companies need to be on top of their digital offerings, such spending is booming, and in some areas, it’s receiving a boost from governments as well.
As occurs with any high-profile surge in interest and investment, fast-growing tech firms in South America can be susceptible to failure, which means strict due diligence is a must.
But in countries such as Argentina, Brazil, Uruguay, Colombia, and Chile, the IT sector is on the rise and steering slices of investor interest away from the commodity economy.
Consumer Winners and Losers Tied to Tech
In addition to its impact on the financial sector, technology is altering consumer behavior in Latin America. Especially in the wake of the pandemic.
More specifically, as businesses shut down, demand for everyday goods didn’t disappear. So, consumer-facing businesses responded with delivery options and expanded websites that allowed people to make purchases from anywhere.
Although the restrictions have passed, the alternative way of shopping has remained. Many of those who used to go to stores are staying at home and making purchases via their phone, so retailers who continue to respond to that trend—largely through investments in technology—are emerging as market leaders.
Nearshoring Ripple Effects Bear Consideration
As U.S. trade and commerce relations with China have faltered amid political posturing, U.S.-based manufacturers have increasingly steered outsourced work to Mexico, a direct beneficiary of the U.S.-Mexico-Canada Agreement that streamlines trade between the three countries.
Commonly referred to as nearshoring, this trend has most prominently built up the automotive manufacturing industry in Mexico. Relying on maquiladoras, or facilities built to manufacture goods almost exclusively for export, the country supplies a wide array of automakers and according to the Federal Reserve Bank of Dallas, nine of 10 vehicles made in Mexico are exported.
Additionally, the Dallas Fed found that Chinese foreign investment is rising to fund plants that build computer hardware for export into the U.S.
While the interest of multinational corporations is impressive, we also see promise in the businesses that build up around these manufacturing hubs. For example, in response to staffing needs at a remote Nissan plant, a local logistics company runs 200-plus buses a day between the facility and a city 85 kilometers away.
Similar ripple effects across existing companies, new businesses, and consumer buying power are helping stimulate growth that bears watching.
A Wider Lens of Opportunity
It’s hard to imagine that raw materials, agricultural commodities, oil, and gas could shrink to a shadow of their current importance to the economies of South and Central America.
So much of the world is dependent on our production.
But if investors continue to only track commodity-related sectors for investment ideas, we believe that’s a recipe for missing out on some exceptional potential growth stories.
Especially as the financial services, information technology, and consumer sectors only build on their pandemic-era advances and claim an increasingly larger share some of the region’s more vibrant economies.
