Latin American Stock Fiesta Has Staying Power

Among emerging markets, Latin America has been the place to be for the last three years. The MSCI Emerging Markets Index shows Latin America bringing in 14.56% in cumulative gross returns compared to 3.86% in the rest of the emerging markets as a group from May 2020 to May 2023. Year to date, the largest stock indexes in Brazil and Mexico are up 22% and 24%, respectively.

The region’s secret: A combination of geopolitical factors from the war in Ukraine to the U.S. trade war with China driving investment and production to Latin America. With better than expected growth, especially in Brazil and Mexico, the region saw success by hiking interest rates in 2021 which led to disinflationary cycles in late 2022, according to Franklin Templeton portfolio manager Daniel Popovich.

“It has opportunities to shine bright,” says Verena Wachnitz, the Latin American portfolio manager for T. Rowe Price. T. Rowe Price (PRLAX) is one of the few mutual funds in the region, with $391 million in net assets.

Over the past three years, the iShares MSCI Brazil (EWZ
EWZ
) exchange-traded fund is up 39%, while the MSCI Mexico ETF (EWW
EWW
) has more than doubled, gaining 111%. Chile’s stock market, tracked by MSCI Chile ETF (ECH
ECH
), has returned 29% since June 2020. Colombia and Argentina have been laggards due to higher levels of risk and inflation.

Do the positive returns have the power to keep on coming after years of solid performance? Alberto Osorio, CEO of the Mexico Fund (MXF) says yes, especially for Mexico. Osorio added that the MSCI Mexico index is currently trading below five-year average valuations, and also at a discount to valuations of the S&P 500 and Dow Jones Industrial Average. Increased exports from Mexico have generated the strongest peso in seven years, now trading at 17 pesos per U.S. dollar. During the pandemic, the exchange rate hovered around 25 pesos per dollar.

“We really believe that means the rally may keep going,” Osorio says.

Popovich shares Osorio’s confidence. “I think we have some interesting drivers for growth and return,” Popovich says. “As geopolitical tensions grow, especially between the U.S. and China, Mexico becomes one of the most benefited economies.”

Because the region is rich in natural resources, Popovich says Latin America will continue to be a top supplier of metals and commodities especially as economies transition to renewable energy.

After oil prices hurt economies in Latin America in 2014, Brazil’s 2016 economic recession, and political uncertainty, Wachnitz is cautiously optimistic.

“I’ve been doing this for many years, and it’s been a volatile journey. I’d like to stay with my feet on the ground,” she says without saying for certain whether the growth has staying power.

Even though there has been solid movement for a few years, Wachnitz says it is not too late for investors to take advantage of the growth. Banking institutions are performing well, especially in Brazil and Mexico, because of the consolidated banking system, falling interest rates, and increases in FinTech, according to Wachnitz.

The T. Rowe portfolio has an 8% allocation in Itatú Unibanco (ITUB), a Brazilian bank based in São Paulo. The bank holds the top spot in the portfolio.

MercadoLibre
MELI
(MELI) is another one of her picks. Despite the record high inflation in Argentina, the Argentinian based rival to Amazon
AMZN
has picked up traction this year, up over 42% year to date. While the stock could be overvalued with a price earnings ratio over 95, the company has a strong growth potential according to Wachnitz.

“They’ve come out the winner reasonably across the board,” she added.

For Osorio, he believes manufacturing, airports, and tech companies are performing well despite high inflation rates and high interest rates. Because of the war in Ukraine and the higher cost of manufacturing in China, more companies are moving manufacturing to Mexico, including Tesla
TSLA
which recently announced a new factory will be in the northern border state Nuevo Leon.

Vesta (VESTF), a real estate company building distribution centers in Mexico, is another Osorio has his eyes on. The Mexican Fund currently has 2.39% of their holdings in the company. The company has seen higher rental income from other companies using their centers because of higher tariffs and higher interest rates.

For airports, Grupo Aeroportuario del Centro Norte (GAERF)’s stock increased by 48.31% in the last year. The company manages airports in central Mexico, and the Mexico Fund has 3.81% of their holdings in the company.

“Airports in Mexico have had significant growth and still, in our view, have a long way to go,” Osorio says.