Bloomberg Línea — While major Latin American economies are expected to see growth slow in 2023, Citigroup (C) has highlighted that central banks in the region have acted faster than in developed economies and that is why inflation has been declining.
According to the financial giant, consensus growth for the region is below 1% this year, compared with about 3.7% in 2022.
“Although we anticipate more favorable financial conditions going forward, Latin American central banks are likely to remain cautious,” noted this report prepared by Citi Global Wealth Investments.
Still, the authors noted, “We see selective opportunities across Latin America, as central banks are likely to begin easing cycles in 2023. Brazil is likely to benefit from the rebound in China.
Continuing with the region, Citigroup noted that, in terms of political and structural reforms, governments seen as populist have been less destabilizing than markets feared, which has somewhat curbed capital outflows.
According to the Citigroup team, local currencies have been very resilient thanks to a combination of high local interest rates and declining inflation. This has supported local debt markets, as evidenced by the 14.6% year-to-date increase in Bloomberg’s LATAM Local Debt index.
In one section of the report, Citi’s head of global equity investment strategy, Joseph Fiorica, noted that the group’s Global Investment Committee has recently added stocks in Asia, Europe and Latin America, which together trade at a 30% discount to the S&P 500.
And given the very strong performance in the US, value is starting to emerge in profitable small- and mid-cap stocks as an additional alternative to expensive large-cap US stocks.
The outlook for Brazil
The Citigroup report highlights some aspects about Brazil:
- Brazil’s economy surprised positively in 2022, growing by 2.9%. Against this backdrop, Citi projected that, as the impact of higher interest rates kicks in and the rest of the world slows, the country is also likely to slow its real growth to less than 1% in 2023.
- As it is, China would partially offset this current slowdown in Brazil. The Asian giant, Brazil’s main trading partner, is expected to grow by close to 6% in 2023, providing ample support for economic activity in the country in the years ahead.
- On the other hand, Citi projects that Brazil’s new fiscal rules should ease concerns around fiscal excesses and should also give the central bank more room to manage inflationary risks.
- “Inflation is easing, which may give the monetary authority room to ease. Right now, real rates are close to 9% while equity multiples are below 8x,” the report synthesizes.
The outlook for Mexico
The report’s highlights about Mexico:
- “Mexico, with its close ties to US industry and demand, has benefited from geopolitics and the surprisingly resilient US economy. As US companies moved their operations closer to home, nearshoring has translated into strong capital flows to Mexico and remittances are also robust as a result.”
- “Capital investment is on the rise and consumer confidence remains strong. This positive macroeconomic environment has not gone unnoticed by investors. The Mexican peso is up 11% and the Mexican stock market has gained an impressive 20% in US dollar terms so far this year.”
- “Given our expectations of a mild US recession, we view Mexican markets as a momentum-based bet now, with limited incremental value at current levels.”
Spotlight on four of Latin America’s leading economies
A document prepared by Société Générale, a European financial services company, referred to the situation in four of the region’s main economies:
Regarding Brazil, the report notes, “The growth highlight in the first quarter of 2023 was misleading. The economy is slowing despite positive surprises. The inflation situation is almost conducive enough for the central bank to start easing soon (currently an uncertainty between the August or September Copom meeting). We expect significant easing in the coming quarters. Fiscal consolidation in 2024 could fall short of requirements, but there is no imminent danger to government debt stability. Commodity demand/price outlook and reforms are important for the medium- to long-term macro-fiscal outlook.
Regarding Mexico: “The domestic economy is doing better than external demand and is driving growth. A strong labor market is also helping. The domestic economy is unlikely to continue to drive growth for long if the U.S. economy slows or if the near relocation issue does not materialize. The economy is likely to slow in the future, but the risk is tilted to the upside in the near term. High core inflation as a result of a tight labor market remains a challenge forcing Banxico to keep rates high for an extended period. The fiscal situation and outlook remain stable.
Regarding Chile: “The economy is currently in contraction after disproportionate growth in the previous two years. Prices and the external balance should continue to adjust to the economic slowdown, although it is taking longer than expected. The central bank has signaled an upcoming rate cut (probably starting in July). We expect sharp rate cuts in the future, taking Chile’s inflation/interest rate history as a reference, but risk is probably tilted to the upside.”
Regarding Colombia: “Upside growth surprises have continued this year, putting pressure on the external and fiscal balances and inflation, which has just peaked. We expect the economy to slow and inflation to decline in the coming months and quarters. The tightening cycle is probably over, but the central bank is likely to keep an eye on the growth-inflation dynamic in the coming months before cutting rates.
