Latin America set to benefit from US market shifts, investors say

Reuters

6 hours ago

NEW YORK, June 9 (Reuters) - Latin America has emerged as a top investing destination as ongoing wars - both of the military and trade variety - make investors seek options in a region they view as refreshingly untroubled by tariffs and major conflicts.
Portfolio flows data suggests that investors are largely underexposed to Latin America even as many stock markets - including Brazil's and Mexico's - are trading at or near record highs, while sovereign bonds offer still-attractive yields. Although some prefer not to chase a stock rally, others have focused on the local debt market.
"The Latam story is easier to tell now as stocks are cheap and there is a lack of options in emerging markets," said Leonard Linnet, head of equities at Itau BBA. "China is at the epicenter of the trade war, India is more expensive and has some geopolitical issues with Pakistan and investors are avoiding investing in Russia.'
Brazil and Mexico are the behemoths where most international investors concentrate their exposure to Latin America. Both carry by far the largest regional weights in global benchmarks for stocks and bonds. Among all emerging markets, however, the two countries are relatively small. Brazil, which is Latin America's largest economy and market, constitutes 60% of the MSCI Latam index (.MILA00000PUS), opens new tab and just below 5% of the broader EM index (.MSCIEF), opens new tab.
The stock markets of both Brazil and Mexico are trading near record highs and at low valuations, and their bonds offer attractive yields with the backdrop of softening monetary policy.
The investment avenues thin out for some institutions as some Latin American markets are comparatively illiquid or lack investment-grade credit ratings. But in that higher-risk environment other investors see returns.
"The investment opportunity in Latam does not require large changes in global asset allocations," Rob Citrone, founder of global macro hedge fund Discovery Capital, told his investors recently.
"Asset flows, on the margin, dictate much of the price performance, so small changes to large markets, such as the U.S., can have big impacts on smaller markets, such as most in Latam."
After a 26% decline in the regional stock index last year, Latam is the best performer for stocks this year. Within the MSCI universe, investors are paying just over $9 for each dollar in earnings across Latam - compared with more than $19 for developed markets (.WORLD), opens new tab.
Although Mexico is closer to the trade war's epicenter, its listed companies are not so exposed to it, so the country's stocks are moving higher.
"Price-to-earnings multiples in Latam are low now even when compared with its own historical average," said Itau BBA's Linnet. "Brazil is not only cheaper than China and India, it is trading at a 23% discount from (itself)."
Netherlands-based Robeco has been increasing allocation to Latin America, mainly to Mexico, Brazil and Chile, as it has partially shifted away from the U.S., said Wim-Hein Pals, head of emerging markets team at Robeco. The firm is overweight Latam, while it is close to neutral China and underweight India.
Both dollar weakness and idiosyncratic stories, including last year's FX selloff, have bolstered the region's currencies.
With its benchmark interest rate at 14.75%, Brazil's real has emerged as one of the favored global carry currencies and is up 9% against the greenback this year. The Latin America currency index (.MILA00000CUS), opens new tab is up nearly 15% this year and last week touched a 14-year high.
The outlook for the global economy and the issue of reallocating outside of the United States both face uncertainties and it is far too soon to expect material inflows to Latin America, said Graham Stock, senior emerging market strategist at RBC Global Asset Management.
"Having said that, you could always see short-term trades that are dollar-bearish, and you could see some allocation into Latin American currencies, because they're high yielding. The carry is attractive there, and I think that is part of what we've seen."
Beyond the region's largest economies, Argentina has been a forbidden fruit of sorts for investors over the past years. Its dollar debt has returned over 100% at the index level since President Javier Milei was elected in late 2023 and the local Argentine stock index (.MERV), opens new tab rose 173% last year.
Yet Argentina remains outside major benchmarks, making the market inaccessible to some of the largest investors - some of whom have grown more curious about Argentine assets since capital controls were all but lifted in mid-April.
"We couldn't buy in on Argentina for all practical purposes while they were under the capital controls," said Alison Shimada, head of the Total Emerging Markets Equity team at Allspring Global Investments. "Now that that has changed, we would be interested, and we're doing some work on it, but at the right price."
Some investors would like to see more Latam companies listed.
Brazil also attracts most of the region's venture capital, with over 1,400 VC-backed startups since 2013 as of the first half of last year, according to the most recent data from LAVCA, while Uruguay, Chile and Colombia emerged as alternative hubs for innovation.
Regardless of how many of these startups actually go to market, they will likely find investors thirsty for places to put money to work in the region.
Said Allspring's Shimada: "I'd love to see those smaller countries have more listed assets."