Latin American Stock Fiesta Shows Strong Performance and Momentum
Latin America has emerged as a leading destination for investors over the past three years, outperforming other emerging markets by a significant margin. According to the MSCI Emerging Markets Index, Latin America has delivered cumulative gross returns of 14.56% compared to just 3.86% for the rest of the emerging markets as a whole between May 2020 and May 2023. Brazil and Mexico, in particular, have been the standout performers, with their largest stock indexes surging by 22% and 24%, respectively, year to date.
There are several factors driving this remarkable growth in the region. Geopolitical dynamics, such as the war in Ukraine and the U.S.-China trade war, have prompted investors to turn their attention to Latin America. These global conflicts have led to increased investment and production in the region as companies seek to diversify their supply chains and mitigate risks. Additionally, countries like Brazil and Mexico have experienced better-than-expected economic growth, bolstered by a series of interest rate hikes in 2021 that helped to curb inflationary pressures and stimulate investment.
According to Verena Wachnitz, Latin American portfolio manager for T. Rowe Price, the region still has plenty of opportunities for further growth. She believes that Latin America has opportunities to shine bright, citing the robust performance of banking institutions, particularly in Brazil and Mexico. The consolidation of the banking system, falling interest rates, and the rise of financial technology (FinTech) have all contributed to the success of the banking sector in these countries.
The positive returns in Latin America’s stock markets have been impressive over the past three years. The iShares MSCI Brazil exchange-traded fund has gained 39%, while the MSCI Mexico ETF has more than doubled, recording a gain of 111%. Chile’s stock market, represented by the MSCI Chile ETF, has also shown strong performance, returning 29% since June 2020. However, other countries in the region, such as Colombia and Argentina, have lagged behind due to higher levels of risk and inflation.
Despite the solid performance and positive outlook for the region, some experts remain cautiously optimistic. Alberto Osorio, CEO of the Mexico Fund, believes that Mexico, in particular, has the potential for sustained growth. He points out that the MSCI Mexico index is currently trading at a discount to its five-year average valuations, as well as compared to the S&P 500 and Dow Jones Industrial Average. Increased exports from Mexico, driven by geopolitical tensions between the U.S. and China, have also strengthened the Mexican peso, which now trades at 17 pesos per U.S. dollar, the strongest in seven years.
Daniel Popovich, a portfolio manager at Franklin Templeton, echoes Osorio’s confidence in Mexico’s prospects. He believes that as tensions escalate between the U.S. and China, Mexico stands to benefit as one of the most advantageous economies. With its abundant natural resources, Popovich predicts that Latin America will continue to play a significant role in supplying metals and commodities, especially as economies shift towards renewable energy.
It is worth noting that Latin America has experienced its fair share of economic challenges in the past, including the slump in oil prices, Brazil’s recession in 2016, and political uncertainties. Therefore, while the current growth momentum is promising, experts urge caution. Wachnitz emphasizes the need to remain grounded, given the region’s historical volatility.
Despite the strong performance in recent years, there are still opportunities for investors to capitalize on the growth in Latin America. Wachnitz highlights the potential of companies like Itaú Unibanco, Brazil’s largest bank, and MercadoLibre, an Argentinian e-commerce giant known as the Amazon of Latin America. While the Argentinian economy faces record-high inflation, MercadoLibre has shown significant growth potential.
Mexico’s manufacturing sector, airports, and tech companies also present attractive investment opportunities. Osorio cites examples such as Tesla’s decision to establish a new factory in Mexico and Vesta, a real estate company building distribution centers in the country. Grupo Aeroportuario del Centro Norte, which manages airports in central Mexico, has also experienced substantial growth.
In conclusion, Latin America’s stock markets have demonstrated strong performance and momentum over the past three years. The region has benefited from geopolitical factors and robust economic growth in countries like Brazil and Mexico. While experts remain cautiously optimistic, there is potential for further growth, particularly in the banking sector, manufacturing, and infrastructure. However, investors should exercise caution and consider the region’s historical volatility and potential risks associated with individual countries.
