Why Latin American stocks are attractive right now

Latin America is proving “a cherished destination for investors in 2022”, Anisha Sircar and Rodrigo Campos tell Reuters. Low valuations and soaring commodity prices boosted stocks in the region. The currencies of Brazil, Colombia, Peru and Chile are the “four best performing currencies in emerging markets against the dollar” so far this year.

Stronger local currencies contribute to flatter gains for foreign investors. The MSCI Emerging Markets Latin America (LatAm) index has gained 25% in dollar terms since the start of the year, even as the broader MSCI Emerging Markets (EM) index has fallen 8%.

This surge in outperformance is welcome after a long period of disappointment. In the three years to March 14, the MSCI Latin America Index fell 4.7%, compared to a 9.8% gain for the MSCI Emerging & Frontier Markets Index, Kathleen Gallagher told Investment Week.

Brazil, the region’s largest economy, fell into a severe recession in the mid-2010s. It was barely recovering before Covid-19 hit.

However, with rising commodity prices, the outlook is improving. Data from the Institute of International Finance shows that “on average, 72% of total exports from the largest Latin American countries were commodity-related last year.”

With the interruption of Russian supplies, the world is especially desperate for Brazilian crops, Colombian oil and Chilean copper. Markets in the region are closely correlated to movements in commodity prices; the last big boom coincided with the great commodities supercycle of the early 2000s.

Brazil is back in fashion

Brazil plays a disproportionate role in the landscape since its shares represent 62% of the MSCI LatAm. The local Ibovespa index has gained 15% since the start of the year. “High yields” and “cheap stocks” attract investors, Vinicius Andrade tells Bloomberg, with $14 billion in net inflows from foreign investors since mid-December. “Even after the recent rebound, the Ibovespa is trading at
7.7 times forward earnings, below its ten-year average of 11.7 times.

All is not rosy, says The Economist. Generous pandemic fiscal support and the “worst drought in 90 years” combined to drive Brazilian inflation to 10.5%. Incumbent President Jair Bolsonaro is a “fiscal chameleon” and is splurging on public funds in a bid to bolster his dwindling support.

This plan is not working. Polls suggest Bolsonaro is set to lose to former President Luiz Inácio Lula da Silva in elections this fall. Left-wing Lula’s victory in 2002 “spooked the markets, but he was reasonably responsible in his spending in his first term, at least”. The rally shows investors are confident that Lula will “steer moderately” if he wins again.

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