Choosing a company to buy in emerging markets must not only be a matter of country risk or growth expectations.

By Eugenio Micheletti* for staffingamericalatina

Being our daily job to analyze investors’ expectations, we realize that the focus is set on the growth projections of the local economy and the general situation of the staffing industry. Clearly, these are the main factors to consider when selecting a country where to invest. However, other elements (or a combination of elements) can motivate investments in countries that are not the most attractive a priori.

When revising the central economic indicators of Latin American countries we come up with the following situation: Peru, Colombia and Mexico have the best GDP figures for 2015 (2.8%, 2.8% and 2.4%, respectively) and the best projections for 2016 (3.6%, 2.7% and 2.8%).

As regards inflation rates, with the exception of Venezuela (+150%) and Argentina (+30%), the other countries of the region have had an average rate of 5%. Similar levels are expected for 2016.

Local currencies have strongly devaluated in relation to the American dollar in the entire region, a piece of information that shows the stability of profit of a strong currency.  Peru  (-14.4%) and Chile (-15.62%) were the countries that devaluated their currency the least.

The country risk is around 280 and 550 basic points in the main countries of the region, which does not seem to be a major difference for these kind of investments.

An increasingly relevant aspect for investors is countries’ economic freedom, measured in terms of State’s intervention in the market’s regulation, restrictions, corruption levels, regulations for foreign trade, among other aspects. The Heritage Foundation and The Wall Street Journal develop a ranking for 178 countries. The positions of Latin American countries is the following: the best placed is Chile (7^th place); Colombia 33°; Uruguay 41°; Peru 49°; Paraguay 83°; Brazil 122°; Bolivia 160°; Argentina 169° and Venezuela closes the ranking with Cuba and North Korea. In the case of Argentina it is worth mentioning that an element that damages its position is the claim for the Falkland Islands sovereignty (a political aspect). In addition, with another political party ruling the country since the end of 2015, there are improvement expectations regarding the country’s situation.

As regards the productive sectors, during the past few years the prices of commodities and primary matters (cereals, oil, minerals, etc.) have decreased; and they are expected to keep on decreasing in 2016. These sectors demand high volumes of investment for processes development that enable adding value to products.

Considering all this information, the best destinies are Peru, Colombia, Mexico and Chile, and, as a matter of fact, they are. However, we are stating that there are other factors that make a company attractive, even though it may be located in another country of the region.

The specific situation of some sectors for each economy; market niches with above the average profits; and qualitative aspects of certain companies may be very attractive for investors.

For instance, in Brazil there are several market niches with average operational profits (EBITDA) over 8% (technology, retail, logistics, etc.), as the service has a high added value. Something similar happens in Argentina with the oil and technological sector.

Another aspect to consider is how companies balance the mix of services, including services with higher added value and price, such as payroll, search and selection, BPO (Business Process Outsourcing), among others.

In conclusion, we suggest to add a deep analysis of specific aspects of every market and company when looking for investment opportunities. These may be key for a successful purchase, as well as to improve the return over investments.

Paying attention to purchase opportunities of properly positioned and managed companies may prove to be more profitable than looking for options in countries with good macroeconomic projections, as long as risks are adequately considered in each case and attractive proposals are built for the current stakeholders.

*Eugenio Micheletti is Director of Emerging Staffing Brokers – emicheletti@emergingsb.com