Amid global turmoil, Latin American stocks are posting their strongest performance compared to other emerging market regions since 2009, thanks to the economic and political stability the region enjoys.

In a recent analysis of benchmark indices from major developing regions, Latin American stocks have hit a 14-year high against emerging Europe, the Middle East and Africa. In addition, they are on track to post consecutive annual gains against Asia, marking a milestone in this period, as reported by Bloomberg.

The key drivers of this rally match those of 2009: a robust US economy and expectations of an accommodative stance from the Federal Reserve. However, it is also attributed to a comparative advantage: while Asia faces challenges due to the Chinese economic slowdown, and the EMEA region grapples with war, debt problems and currency vulnerabilities, Latin America benefits from its position distant from geopolitical tensions. , its proximity to the largest world economy and a greater capacity to implement economic stimuli.

According to Nenad Dinic, equity strategist at Bank Julius Baer & Co. in Zurich, “Latin America currently appears to have an advantage over EMEA heading into 2024, mainly due to its favorable macroeconomic environment and positive market reactions to planned policy changes”. He added that the EMEA stock market remains more vulnerable to geopolitical risks, especially given the potential escalation of conflicts in the region.

Rising Latin American stock index

The MSCI EM Latin America Index, which gives a combined 90% weighting to Brazil and Mexico, has seen an impressive 16% rise so far this year, marking the most significant advance since 2017. Among the main contributors to this rally Petróleo Brasileiro S.A. is located (PETR4), Fomento Economico Mexicano SAB (FEMSAUBD) and Itaú Unibanco Holding S.A. (ITUB4).

Earnings estimates for index members have hit their highest point in a year, and valuations are half what they were three years ago.

According to Dinic, “Brazil began an aggressive cycle of rate cuts, while improved fiscal prospects have bolstered investor confidence.” Additionally, Mexico’s economy has seen significant benefits thanks to the nearshoring trend, where U.S. companies move their production facilities closer to the local market.

In contrast, the EMEA equity index has seen a 0.5% decline in 2023, with South African mining stocks and Middle Eastern banks the biggest drags.

In addition, the region’s currencies are pegged to the US dollar, limiting their ability to recover when the dollar weakens. This diminishes its appeal at a time when yields in countries like Brazil are attracting traders, according to Ashish Chugh, money manager at Loomis Sayles & Co.

K. Tovar

Source: Bancaynegocios

(Referential image source: Unsplash)

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