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Identifying Opportunities in Latin America

The last five years have been tough for emerging markets with fears of currency collapses, weak fiscal outlooks, and softer commodity prices weighing heavily on their performance. That has seen many emerging markets perform poorly lagging developed bourses including the TSX and NYSE.

The MSCI Emerging Markets Index only gained 14% over the last year compared to the S&P 500’s 26% and the S&P/TSX Composite’s 16%. Some of the worst-performing emerging markets are in Latin America, notably the Andean economies of Chile, Colombia and Peru, with the MSCI Andean Index losing almost 13% over the last year.

Those countries have returned to growth, and Colombia is poised to be a standout performer during 2020, making now the time to invest.

Better-than-expected growth

For the third quarter 2019, Colombia’s gross domestic product (GDP) expanded by 3.3%, exceeding expectations. This indicates that the Andean nation has finally returned to growth after a disappointing five years where the economy stalled and GDP growth bottomed at 1.4% in 2017. As a result, Colombia’s stock market has experienced a solid rally to see the COLCAP stock index up by 24% over the last year, recently touching an all-time high.

The International Monetary Fund (IMF) anticipates that Colombia’s GDP will expand by a notable 3.6% in 2020, which appears achievable because of higher third-quarter 2019 growth and other improving economic indicators. Firmer oil and signs that a full-blown trade war between the U.S. and China has been averted also bode well for Colombia. This is because petroleum extraction is responsible for 33% of Colombia’s export earnings and just over 3% of GDP. Investment in Colombia’s energy patch has long been a key driver of foreign direct investment in the Andean nation.

China, over the last decade, has become Colombia’s second most important trading partner after the United States. The end of the trade war also bodes well for commodities, particularly oil and base metals, because China’s manufacturing sector is one of the largest consumers of energy and metals globally.

For these reasons, Colombia’s economy will firm during 2020 and GDP growth should soar. That bodes well for Bank of Nova Scotia (TSX:BNS)(NYSE:BNS). Through a series of acquisitions, Scotiabank has become the fifth-largest bank in Colombia with a significant presence in the consumer and small- to medium-enterprise market segment.

There is a direct correlation between economic growth and greater demand for credit as well as other financial services. This, along with Colombia being heavily underbanked and possessing a young, rapidly growing population, will drive act as powerful tailwind for Scotiabank’s international earnings, bolstering the bank’s profitability.

Colombia as well as the other Pacific Alliance nations of Peru, Chile, and Mexico are important growth drivers for the bank, with fourth-quarter 2019 revenue from those countries rising by 9% year over year and net income by 5% because of strong credit and deposit growth. This has the potential to offset any weakness in Scotiabank’s Canadian operations because of a softer housing market.

Another Canadian business, which will benefit from Colombia’s economic resurgence, is Brookfield Renewable Partners (TSX:BEP.UN)(NYSE:BEP). In 2016, it acquired Colombia’s third-largest electric utility Isagen, which owns a portfolio with 2,732 megawatts (MW) of hydro and 300 MW of thermal capacity, making it responsible for around 17% of Brookfield Renewable’s total installed capacity. Brookfield Renewable continues to benefit from the unique conditions that exist in Colombia, where a combination of growing electricity consumption and energy shortages have allowed it to secure higher than market prices.

This evident from Brookfield Renewable’s third-quarter 2019 results, where adjusted EBITDA from its Colombian hydro assets expanded by a healthy 17% year over year, funds from operations (FFO) shot up by an impressive 20%, and net income surged 73% higher. That saw the partnership’s Colombian hydro assets become responsible for 11% of its consolidated EBITDA and 18% of total FFO for the period, highlighting that improved economic growth in Colombia will give Brookfield Renewable’s earnings a solid lift.

Foolish takeaway

Latin America is poised to return to growth, and Colombia’s will have one of the fastest-growing economies in the region. That will significantly benefit Scotiabank and Brookfield Renewable, making now the time to add them to your portfolio.

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Fool contributor Matt Smith has no position in any of the stocks mentioned. The Motley Fool recommends BANK OF NOVA SCOTIA.

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