Few places have suffered as much from the Covid-19 pandemic as Latin America. Of the top five countries by total reported deaths globally, three – Brazil, Mexico and Peru – are in the region. Weak healthcare forced governments to implement very strict lockdowns last year, says The Economist. Tight budgets have constrained stimulus efforts. The result? GDP in Latin America and the Caribbean fell by 7% in 2020, compared with a global average contraction of 3%.
Latin America came into the crisis with “pre-existing conditions”, says Eric Parrado on Project Syndicate. Productivity has lagged more successful countries for decades. High commodity prices after the financial crisis gave Latin American governments an opportunity to turn things around. But they put reform “on the back burner” and raised spending on subsidies rather than infrastructure.
A bet on commodities
The region’s market is exceptionally cyclical: energy and materials stocks make up 34% of the MSCI EM Latin America index; financials comprise 23%. Information technology accounts for just 1.8%. Weak commodity prices have made this a miserable decade. The MSCI index has fallen by 40% over the last ten years in dollar terms. The recent commodities rally had given shares a boost, but that too has cooled, leaving the index up by just 2% so far this year. Brazil makes up two-thirds of the index, while Mexico accounts for just over a fifth. The remainder is largely made up of Chile, Peru and Colombia.
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On a price/earnings (p/e) ratio of 13.6, stocks are certainly cheap, but they don’t look so attractive given the risks, say James Norrington and Mary McDougall in the Investors’ Chronicle. The region’s politics have turned ugly; “horrifyingly, 91 politicians were killed, including 14 candidates”, in the months before Mexico’s legislative elections. Brazil’s election next year could see divisive president Jair Bolsonaro square off against former leader Lula da Silva, another polarising figure. “A Marxist-Leninist is poised to become Peru’s next president”, adds Ruchir Sharma in The Financial Times. A communist could also come to power in Chile. Still, history shows that the region’s economic fortunes depend on one thing: commodity prices. The economy boomed along with commodities in the 1970s and the 2000s. Bad decades for raw materials, such as the 2010s, are “often the harbinger of a better one to come”. A sustained commodity rally would negate worries about the latest crop of populists.
Not so fast, say Norrington and McDougall. Shares are cheap and could benefit from a cyclical boom, but “many of the attractive elements offered by Latin American economies… are also present in other emerging markets with less political risk.”
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