Bloomberg Línea — Latin America and the Caribbean will have meager economic growth in 2023 and the situation will likely not improve in the following year, a situation that will have a negative impact on the prices of the region’s financial assets, which appear to be unattractive to investors.
However, there are some exceptions: on the one hand, there are those who believe that the low valuations of bonds and stocks in Mexico give hope for an upside in the North American country.
Slow growth for the region, and its impact on financials
“The performance of companies listed on a stock exchange is related to the economic performance of the country or the region,” said Jacobo Rodríguez, director of financial analysis at Black Wallstreet Capital, adding that there are high expectations that some developed nations will fall into recession and that would affect Latin American markets.
“Low growth is always bad for assets,” confirmed Marco Oviedo, strategist for LatAm at Brazilian brokerage XP.
The Economic Commission for Latin America and the Caribbean (ECLAC) estimatew that the aggregate Gross GDP growth of Latin America and the Caribbean will be only 1.2% in 2023. Looking ahead to 2024 and 2025, there does not seem to be a substantial improvement: a few days ago, William F. Maloney, chief economist for Latin America and the Caribbean at the World Bank, said that the regional GDP will grow 2.4% annually, a rate that, according to his view, “is not enough to alleviate poverty or reduce social tensions”.
But it does not seem to be enough to make it attractive to invest in this part of the world either.
“The region has been having a very mediocre performance for some time and below any global index, except last year when it was able to take advantage of the boost in commodity prices, which allowed it to have a better performance in a context of global falls”, said Martín Polo, strategist at Argentine broker Cohen Aliados Financieros.
Polo added that the prospect of economic deceleration in developed economies and the lower infrastructure investment in China takes away momentum from commodities, and this is bad news for the region in general.
Polo also emphasized that agricultural commodities have a better scenario, and that this may help, but he considered that, in general terms, “the region will be more complicated and there are always political factors contributing to greater volatility”.
For his part, Diego Ferro, director of the M2M Wall Street fund, said: “There is less and less enthusiasm for emerging markets in general. They have not been generating attractive returns for some time now, they are seen more as short-term tactical positions, not as long-term strategic investments”.
A region vulnerable to exterior shocks
According to Jorge Angel Harker, the representative of Holistic (Adcap Financial Group’s correspondent in the United States), it is very likely that in an eventual global recession will mean a similar slowdown in Latin American economies, because Latin America exports commodities, and if developed countries slow down, they will stop demanding those products.
Although he clarified that “it is also true that certain countries could benefit from some commodities that could improve if the Fed were to aggressively lower rates, such as gold and silver. Some oil-exporting countries, such as Brazil, Mexico and Colombia should see some help from this backdrop.”
Harker said that it is more important to understand that the Latin American economy at this moment is very “susceptible to international shocks”.
“These shocks generate the need for macroeconomic policies that they would not be ready to implement. They are policies of greater investment and higher spending, and that in the short term the countries would not be able to implement, as is the case of Peru, Colombia, Mexico and Bolivia, where the numbers today are very different from the pre-pandemic era and have deteriorated quite a lot”.
Opportunities in Mexico and certain assets
Even in a regional context that is not very encouraging, Rodríguez highlighted that Mexico presents some opportunities if the United States does not go into recession.
“Since the end of last year we have had a positive outlook for Mexico, especially because of the very cheap valuations. There are companies that have performed very well in terms of their quarterly results and much of that performance is not fully reflected in the share price,” he said.
In general, Rodriguez said that for Mexico he prefers to go for big-value companies, with low debt levels and that generate steady cash flow.
“We like quality equities,” he said.
He also noted that Mexican fixed income is “super attractive,” as the country has healthy finances, but warned that if the United States goes into recession “it will drag Mexico down”.
Governments move the economy in Latin America
Bolivian economist Mario Aguilar, senior portfolio strategist at Janus Henderson Investors, says that, in Latin America, government models “are what move the economy” and stated that, in this context, the emergence of governments with an unclear view of the market “can bring problems”.
Aguilar pointed out that Mexico could benefit from the supply chain problems in China and the technological friction between the Asian giant and the United States. In line with Rodriguez’s comments, Aguilar reflected that Mexico can benefit “if the United States produces more”.
Even so, the Janus Henderson executive believes that the region’s risk/reward ratio is very low for investors.
Regional ETFs
The region’s most representative exchange-traded fund (ETF), the ILF, now sits 32% below its price five years ago. In the last 12 months it has fallen by 7%.
The positive fact is that, so far in 2023, it has risen by almost 10%.
Fifty-five-percent of the dollars invested by the ILF are placed in Brazilian companies and 28% in Mexican companies, with 7% in Chile and 3.72% in Peru.
Meanwhile, the EWZ (the ETF of Brazilian stocks) has plummeted 33% with respect to five years ago and 15% in the last 365 days. Even so, in 2023 it has improved by almost 6%.
A different reading can be made of the EWW, the Mexican equity ETF. So far in 2023 it is up nearly 21% and has risen nearly 23% in the past year. In line with this, the current price is 24% higher than it was five years ago.