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It’s been a good start to the year for Latin American markets as commodity prices have risen.¹ However, Sam Vecht, Co-Manager of the BlackRock Latin American Investment Trust plc, says the region may just be getting started.
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Latin America has been a bright spot amid turbulent global stock markets since the start of the year. Fuelled by rising commodity prices, the region’s stock markets have outpaced those of wider emerging markets and developed markets such as the US and Europe.² The question for investors is whether this rally is simply a function of high commodity prices, or whether there is more at work.
Certainly, high commodity prices have been a boost for the Latin American markets. The region is heavily weighted to commodities, with significant strength in materials and energy.³ As such, it has been a beneficiary of rising prices.4
However, it is not the only factor driving Latin American markets. The region was long due a reappraisal by global investors. In the vogue for a narrow range of US and Asia technology company, Latin America has been side-stepped.
Central banks
While developed market central banks race to curb the inflationary threat, Latin American central banks have already taken action. Inflation has been an issue in Latin America,5 but across the region, central banks have acted to raise rates.6 This puts them ahead of the curve and has given significant support to the region’s currencies (higher interest rates usually draw international investors and push up currencies), which have appreciated over the year. At the same time, it means they are now likely to reach the peak of their inflation cycle sooner and move to cut rates before developed markets.
Equally, while the region has been a significant beneficiary of the rising commodity prices created in part by the crisis in Ukraine, Latin America doesn’t have a lot of direct exposure to the events in Eastern Europe.
Factor rotation
The final point supporting Latin American equities is a longer-term consideration. Within the major emerging market indices, Latin America equities have declined as investors have focused on the high growth technology companies emerging from Asia. Latin American markets now represent less than 10% of the MSCI Emerging Market indices. It shows the extent to which Latin American stock markets are underappreciated and underowned.
Against this backdrop, we believe Latin America may continue to benefit from a move from growth to value. Expensive technology stocks across the world have started to lose their lustre.8 Global capital has rotated to markets on more compelling valuations and with more sensitivity to improving economic growth. Latin America fits the bill: cash flow and dividends are attractive and valuations are still lower than elsewhere.
There are still plenty of risks in Latin American markets: political upheaval is never far from the surface. In Chile, for example, the new left wing government is threatening nationalisation and implementing constitutional reform.9 However, their bark tends to be worse than their bite. For us, the key is to understand all aspects of every opportunity - the country, the politics, as well as the individual company.
Falling consumption is also a risk until inflation is brought under control. We have less exposure to consumer companies as a result. In contrast, we have significant weightings in the financial sector. The banks have been a beneficiary from rising rates, and can re-set their loans higher, while keeping an eye on asset quality. In this way, the trust is geared to the beneficiaries of higher inflation.
It’s tempting to view Latin America’s recent success as all about rising commodity prices. However, there is more at work. The region still requires selectivity and careful handling, but it is building momentum into the second half of 2022.
This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are from BlackRock as of July 2022 and may change as subsequent conditions vary.
For more information on this Trust and how to access the opportunities presented by Latin American markets, please visit www.blackrock.com/uk/brla
² https://www.msci.com/end-of-day-data-search, 9 June 2022
³ https://www.msci.com/documents/10199/5b537e9c-ab98-49e4-88b5-bf0aed926b9b
6https://blogs.imf.org/2022/07/27/shifting-global-winds-pose-challenges-to-latin-america/
7https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd5678111
8https://www.ft.com/content/00f6f7de-3d84-419f-bd05-07583a3345c7 May 2022
9https://www.reuters.com/article/chile-mining-constitution-idCNL6N2UC05P December 2021
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Exchange rate risk: The return of your investment may increase or decrease as a result of currency fluctuations.
Emerging markets risk: Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.
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