Latin America has become a rare refuge from this year’s fall in global equities as the region’s stock markets benefit from the surge in commodities prices and traders hunt for bargains.
The MSCI Latin American Index has climbed more than 15 per cent so far in 2022 in US dollar terms, while every other regional sub-index of developed and emerging markets has declined. The MSCI All-World index, a broad barometer for global developed and emerging market equities, has fallen more than 10 per cent on the same basis.
The region has “a lot of wind in the sails” after what had been “a tough number of years”, said Ed Kuczma, portfolio manager for BlackRock’s Latin American equities funds. “It’s been a multiyear period of underperformance and [now] it’ll probably be more than a year of outperformance,” he added.
Latin American markets started 2022 on a strong footing thanks to a combination of cheap valuations, a relatively calm political environment and rising commodity prices. The MSCI Latin America index is priced at 8.6 times expected earnings over the next year, about half of the valuation for the All-World index, Bloomberg data show.
The gains in equities for foreign investors have also been flattered by rising Latin American currencies, which have contributed to around half of this year’s returns.
Foreign investors have driven the gains, pouring R$75bn ($15bn) so far this year into Brazil’s B3 stock exchange alone, according to analysts at Bank of America, even as local investors exited equities in favour of fixed income. In comparison, funds holding European equities, which are seen as heavily exposed to the Ukraine crisis, notched up outflows $13.5bn in the week to March 9 — the biggest redemptions on record, EPFR data show.
“Investors are scrambling to find places that will benefit from higher commodity prices and be insulated from geopolitical risks,” said Gustavo Medeiros, head of research at Ashmore, the emerging markets-focused asset manager.
“Obviously there are risks that will be important to monitor, but from a valuation perspective Latin American assets have a lot of room to go still.”
The crisis in Europe has driven exceptional rallies in a host of commodities, from oil to metals to wheat. All the constituents of the Latin American index are commodities exporters and Brazil, which accounts for almost two-thirds of its weighting, is particularly well-placed to benefit.
In addition to the economic fallout of the war, Latin America also stands to gain from changes in global market structure. Analysts at Itaú Unibanco estimate that the decision to expel Russia from MSCI’s emerging markets index could lead to up to $2.1bn in additional inflows, as investors that track the index redeploy funds to other markets.
Rising food prices increase the risks that inflation rates will spiral further, and political uncertainty is set to rise with upcoming presidential elections in Colombia and Brazil. Still, investors have so far appeared unperturbed by the prospect of a return of Brazil’s leftwing former president Luiz Inácio Lula da Silva, who is ahead of incumbent Jair Bolsonaro in opinion polls.
Frederico Sampaio, Franklin Templeton Brazil’s chief investment officer for equities, said “the good news at least is that the two leading candidates are both known” as they have governed before.
“A surprise would look like an upside risk: a third way candidate looks improbable at this moment but is not impossible . . . [and] would be welcomed by the market.”