The stock markets and exchange-traded funds of Latin American countries have been top performers in part because of market reforms that have supported the development of a vibrant middle class. This is important because it provides a strong base for a consumption led economy and is closely tied to education and productivity levels so crucial to sustained economic growth and political stability. Urbanization and the rise of a middle consumer class are the twins that are driving emerging markets.
While citizens in Latin America see steady economic progress, investors in ETFs such as Latin America (ILF), Brazil (EWZ) and Mexico (EWW) have also been rewarded for their faith in the region's ability to avoid the boom and bust trap that have led in the past to volatile and disappointing market performance.
An article in the Economist points out that these changes are most dramatic in Brazil and Mexico, which between them account for more than half of Latin America's 560m people and 88% of the exposure in the iShares S&P Latin America 40 ETF (ILF). The statistics included in this article are very encouraging and I might add have come without spectacular growth. While Latin America as a whole has averaged annual economic growth of just under 5%, the average for emerging markets worldwide has exceeded 7% during the last four years. Ernesto Kritz, a labor economist in Buenos Aires, reckons that around 40% of Argentine families, up from 20% in 2003, have the monthly income of $1,000 that he sees as necessary for a middle-class lifestyle. In both Brazil and Mexico the incomes of the poorest half of the population are growing faster than the average. In Mexico, although growth has been only moderate, poverty has fallen from 37% to 14% over the last ten years.
The quality of homes and public services are improving rapidly: nearly everyone has electricity, piped water and sewerage. And, most importantly the mood of optimism and progress is feeding the cycle of prosperity and growth. Echoing Ronald Reagan's re-election campaign theme, “Each year has been better than the last,” says Mrs Jozina de Arruda. Between the profit from the kiosk and her husband's wages as a security guard at a bank, they earn $900-1,200 a month.
They are members of a new middle class that is emerging almost overnight across Brazil and much of Latin America. Tens of millions of such people are the main beneficiaries of the region's steady and long awaited economic stability and recent economic growth. Having left poverty behind, their prosperity is driving the rapid growth of a mass consumer market and this has profound and positive implications for the region's politics. For a solid middle class means that politicians will be held accountable for maintaining and expanding progress rather than catering to elites and ignoring the plight of the poor striving for their own middle class lifestyle.
By Carl Delfeld of the Chartwell ETF Advisor
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