Why Latin American stocks are attractive right now

Latin America is proving “a darling destination for investors in 2022”, say Anisha Sircar and Rodrigo Campos for Reuters. Low valuations and soaring commodity prices have given the region’s stocks a boost. Currencies in Brazil, Colombia, Peru and Chile are the “four best-performing across emerging markets against the dollar” so far this year.

Stronger local currencies help flatter gains for foreign investors. The MSCI Emerging Markets Latin America (LatAm) index has gained 25% in dollar terms year-to-date, even as the broader MSCI Emerging Markets (EM) index has dropped 8%.

That spurt of outperformance is welcome after a long spell of disappointment. In the three years up to 14 March, the MSCI Latin America index fell 4.7%, compared with a 9.8% gain for the MSCI Emerging & Frontier Markets index, says Kathleen Gallagher for Investment Week.

Brazil, the region’s biggest economy, fell into a severe recession in the middle of the 2010s. It was barely recovering before Covid-19 struck.

Yet with commodity prices rising, prospects are now looking up. Data from the Institute of International Finance shows that “on average, 72% of total exports in the largest Latin American countries were linked to commodities last year”.

With Russian supplies disrupted, the world is especially desperate for Brazilian crops, Colombian oil and Chilean copper. The region’s markets are closely correlated with commodity price movements; the last big boom coincided with the great commodity supercycle of the early 2000s.

Brazil is back in fashion

Brazil plays an outsize role in the landscape, since its stocks account for 62% of the MSCI LatAm. The local Ibovespa index has gained 15% so far this year. “High yields” and “cheap stocks” are drawing in investors, says Vinicius Andrade on Bloomberg, with $14bn of net inflows by 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.

Not everything is rosy, says The Economist. Generous pandemic fiscal help and the “worst drought in 90 years” have combined to drive Brazilian inflation up to 10.5%. Incumbent president Jair Bolsonaro is a “fiscal chameleon” and is splurging public money in a bid to boost his flagging support.

That plan isn’t working. Polls suggest that Bolsonaro is on course to lose to former president Luiz Inácio Lula da Silva in elections this autumn. Leftwing 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 “govern moderately” should he triumph again.