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Nearshoring Dynamics: Latin America’s Strategic Economic Shift in the Global Market

Episode Description:

Latin America is a region at the cusp of a transformative era as a region. It's become a hotbed of discussion for investors worldwide, as it undergoes a remarkable convergence of forces from a new era of high rates and macro risk to the rise of Nearshoring in Mexico and the demographic changes shaping retirement.

Axel Christensen, Chief Investment strategist for Latin America for the BlackRock Investment Institute, will help us explore how the tectonic shifts in demographics and the strategic embrace of infrastructure spending are creating a mosaic of investment opportunities and what makes Latin America an epicenter of global change.

Sources: Mexico: Average age of the population from 1950 to 2100; World Finance “A Bright Future For Mexico”

Written Disclosures

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

TRANSCRIPT

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Latin America is a region at the cusp of a transformative era as a region. It's become a hotbed of discussion for investors worldwide, as it undergoes a remarkable convergence of forces from a new era of high rates and macro risk to the rise of Nearshoring in Mexico and the demographic changes shaping retirement.

Today I'm speaking with Axel Christensen, Chief Investment strategist for Latin America for the BlackRock Investment Institute. Axel will help us explore how the tectonic shifts in demographics and the strategic embrace of infrastructure spending are creating a mosaic of investment opportunities and what makes Latin America an epicenter of global change.

Axel, thank you so much for joining us on The Bid,

Axel Christensen: Oscar. Thank you for having me.

Oscar Pulido: So, Axel, you're the Chief Investment strategist for Latin America for the BlackRock Investment Institute. You spend a lot of your time in Latin America, and it's a region that we haven't talked a lot about on, The Bid. So, I'm excited to understand a bit more about the investment opportunities, and perhaps just a broad question to start, which is, what are some of the headlines that are shaping the investment landscape in Latin America?

Axel Christensen: Latin America, first of all, it's a region, several countries, a lot of similarities like, common language, some cultural heritage, but a lot of differences as well.

So, some of the headlines that you probably see regarding Latin America recently have to do with elections, have to do with, how Latin America is finding opportunity in some of the mega forces- we can talk about that-how Latin America is becoming a very interesting place strategically for geopolitical powers like the US and China. A lot of interest recently beyond the usual headlines around perhaps sports or food.

Oscar Pulido: Right. And you mentioned it's a big region, it's diverse. there's a lot of different countries. So, let's talk about the mega forces, we've talked about the mega forces with respect to a number of different regions around the world. As a reminder, these are things like, the transition to a low carbon economy, diverging demographics, the future of finance. How are these mega forces impacting the landscape in Latin America?

Axel Christensen: It's a great question, Oscar. If anything, they put Latin America at the forefront. Let me give you a couple of examples.

One of the mega forces has to do with, geopolitical fragmentation. The fact that, after Covid we saw that we had a lot of dependency in certain supply chains or responding to an increase in tensions between the trade of the US and China. Latin America and some specific countries like Mexico are standing out as alternatives to provide more security in that supply chain.

So, there’s a lot of discussion about how Mexico can attract capital in key type of industries. Of course, some that already exist, car manufacturing, but also some new industries like semiconductors, which usually has been something going on in Asia, not so much in Latin America.

So, nearshoring, friend shoring, geopolitical fragmentation, very, very involved in Latin America. Let me mention another one, actually two, for the price of one, Oscar. South America is the place in the world that has the largest reserves of critical resources that we need for two things.

One, to allow us to transition into a lower carbon emission global economy. So, if the world is serious in trying to meet those objectives there's going to be tremendous demand for resources like copper, lithium and other minerals that are abundant in places like Chile and Peru, and somewhat in Brazil as well.

A lot of demand is going to increase investment in that it's going to provide governments with more financial resources to do more. But it's not just the climate change, but also think about AI and how AI is demanding a lot more electricity to have all these super chips functioning. And guess what, copper, again, lithium is very much connected to pick up in electricity demand as well. So, Latin America focal point of a lot of these mega forces, Oscar.

Oscar Pulido: And you mentioned the electricity demand from AI, we had Will Su from our fundamental equities business recently, and he talked exactly on that point. He used terminology in terms of quantities that I had never heard before, just to really bring home the fact that there is a lot of electricity demand that is going to be required. And you're saying in Latin America and in South America in particular, is where these resources exist that will help with that, supply of electricity.

We had Larry Fink also here, not so long ago, and he was talking about his annual letter. One of the themes that he talks about in there is infrastructure, and the need for more infrastructure development and spending around the world. So how does that impact Latin America's economic growth?

Axel Christensen: That's a great question, Oscar. And actually, it links very much into what we were discussing just a minute ago. All these opportunities I mentioned near shoring and Mexico and Central America. The demand for these critical resources in South America will require investment.

Take, all this investment in new production, especially in the northern part of Mexico, you need more electricity, that means more investment in say renewable, energy generation. in Mexico. Mexico will require more supply of water to be able to carry out a lot of these investments. A lot of them are very, intense in water use.

We go to South America, all these mining projects, to get the copper, to get lithium, they don't show up overnight. You have to go through investments, not only in the operation in itself, but also affecting the communities that are around these projects as well. To provide them with housing, water supply, education. And then you have to take these things that tend to be up in the mountain to ports. So, you need ports and roadways. So, you know, to get these mega forces to become real opportunities, infrastructure is going to be the key word there. And so, Larry is spot on and hopefully Latin America will be a very good example of how that infrastructure will, help these mega forces take place.

Oscar Pulido: Right? And infrastructure, being a global need is what Larry's talked about, and you've specified how it could benefit, the Latin America region. You've mentioned Mexico a few times, I know you spend a lot of time there understanding what's going on the ground in the economy. You've talked about Nearshoring, so maybe just say a little bit more about that. How does this trend towards Nearshoring really like impact the workforce in Mexico?

Axel Christensen: Mexico is in a unique position. Not only is it the Southern neighbor of the U.S. but it has been going through, several decades now, a very close integration. If you look at car manufacturing, actually, cars go back and forth, the border between the US and Mexico many times, as they're being built and, finally make it to the US to be sold to, US consumers. So, there's already a very strong basis of manufacturing and integration, logistics, the challenge, and I guess the great opportunity for Mexico to scale up to, go to more sophisticated value added, not just in cars, which by the way it's not, cars, how they used to be, there's a lot of technology in car manufacturing today. But the opportunity is to scale that up, and to have Mexico be a very good alternative to some of the Asian economies that produce semiconductors to provide, for instance, data centers as well. so that full integration with the US, building on what already exists, not only because of the, near location that it has, but also Mexico benefits from, a favorable trade situation with the US and Canada for that matter as well.

No other country has that. Let me give you another example. Electric vehicles built in Mexico are covered by the same credit regulation here in the US that provides consumers, electric vehicles built in Korea or in Germany don't have that. So, Mexico has really a very good opportunity to take this advantage and, make this dream become a real opportunity, Oscar.

Oscar Pulido: And as part of scaling up their manufacturing, you mentioned technology, the role of technology, and I think earlier you talked about semiconductors and how that's typically been something produced maybe in other parts of the world, and you're seeing some of that production in Latin America as well. So, feels like maybe there's a move up the value chain that exactly that you're seeing across the region. We've talked about demographics, globally and how some parts of the world are aging, some parts of the world, perhaps that's not as pervasive. Where does Mexico fit in that continuum? What are you seeing about demographics in Mexico and how is that shaping the retirement discussion in a country like Mexico?

Axel Christensen: Mexico is probably closer to the younger population group of countries, which a majority of emerging economies are. But things will evolve for it to be closer to perhaps where the US is or more developed countries.

It has the benefit of what we call the demographic dividend. That means as younger population goes through school and makes it to the workforce, that really bumps up the economic growth. So, there’s a potential, for further growth in Mexico just because of this. demographics change. But at the same time, it's already something that Mexicans are talking about, looking at how can we shape, our economy, our financial markets to take care of retirement going forward. And, as we learned looking at other countries, having the working population, taking care of retired people is not enough. We need to be able to develop markets and alternatives to allow for people to save, to invest, and to help them face retirement with, dignity, with a clarity on their financial wellness once they've decided to stop working.

Oscar Pulido: And I know I asked you the question specific to Mexico, but as you make your way around the region, is the importance of that retirement discussion something that you hear in other countries in Latin America?

Axel Christensen: Definitely! There's a lot of focus in several of these countries on looking at pension systems, seeing what's working, seeing what has to change, reviewing some of the parameters. Are people saving enough? Are people retiring at the right age? We're living longer. Does it make sense to still retire at the same age that perhaps our grandparents were retiring? How can we also develop working opportunities for people that decide to work longer and perhaps retire a little bit later, so a lot of questions around that.

Not a lot of easy questions 'cause there's a lot of demands in the short term. But this is a discussion, Oscar. It's very important to set your eyes on the long term. Because you want to be taking the right decisions today. So not just us, but our children or eventually our grandchildren also are able to have a great retirement as well.

Oscar Pulido: So, let's bring it to a portfolio. I'm an investor, I'm interested in Latin America, and maybe focus on Mexico maybe as a starting point, given some of the positive trends that you've highlighted. How does an investor, think about an investment in Mexico and their portfolio? How do you think about the context of everything else that they're investing in?

Axel Christensen: So, Mexico, of course, we want to be looking at the nearshoring opportunities. There are industrial companies that already are part of the manufacturing supply chain with the US, that's a very great starting point. We talked about infrastructure. Companies that will be providing electricity, the roads, the houses that this new investment will provide as well.

But why stay at Mexico? Let's continue down towards South America. We have Brazil, for instance, beyond some of these critical resources on the mining. It's a huge market. Looking at how their population, their middle class has been growing, how that middle class is demanding more services, financial services, housing, home improvements. That in itself is a great investment opportunity. And then Brazil also stands out to be one of the major food producers in the world. So, to the extent that geopolitical fragmentation not only has to do with manufacturing supply chain, it also has to do with securing food to your people. So, Brazil is really, leveraging on that opportunity.

And then you have places like Chile, like Peru, we've mentioned in terms of their opportunity regarding, demands of critical resources. And then let me cover the whole regions, there's a very interesting number of, companies that are starting, in Latin America. They're very digital. They're very, technology based. Be it digital banks. It might be payment systems; it might be delivery systems. What's interesting is they're developing and deciding to list themselves as companies directly in the US they're seeking specialized investors. So, when we invest in Latin America, don't just keep yourself to the region. You can find plenty of very interesting Latin opportunities listed here in the US as well.

Oscar Pulido: Right. So, it sounds like there's, some critical natural resources that exist in the region, but there's also a lot of innovation going on, in the region. So, Axel, any final takeaways for, investors when they think about the Latin America region?

Axel Christensen: First of all, it's, a great, area of opportunity. We talked about how Megaforces touch in several aspects of, the region. I also want to highlight the diversity of opportunities. It's not just Mexico. It's not just Brazil. it's also other countries that provide in each of their own different. Industries, different type of companies that are really excellent at what they do. And then just the region itself and what it's also providing to the rest of the world. Some very interesting startups, and not just startups, they're becoming real companies nowadays.

Oscar Pulido: Right And sometimes that innovation is making its way to the US in terms of a US listing. Actually, I mentioned we, we haven't talked a lot about Latin America, in. On the podcast, so I appreciate you, making the trip to New York and giving us a little bit of a tour of the region, this summer for those who want to, learn a little bit more about Latin America.

We have the Copa America, soccer tournament, which is not just Latin America countries, but it's primarily Latin America country. who's your country? Who are you rooting for?

Axel Christensen: My country is my home country, Oscar. I'm originally from Chile. Chile will be playing a difficult group, including World Champion Argentina. in the coming days. I'm rooting for Chile. Chile has been going through a bit of a bump in terms of their great performance in some Copa Americas in the past.

Oscar Pulido: Well, they were the 2015 and 2016 champions if I remember. So good luck to Chile. Thank you for joining us on The Bid, Axel.

Axel Christensen: Thank you for having me, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, check out Geopolitical Insights with Catherine Cress, where we discuss the structural shifts that are redefining global dynamics.

<<SPOKEN DISCLOSURES>>

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

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