August proved to be a challenging month for Latin American equity markets, as they experienced a substantial decline of -7.2% in USD, significantly underperforming both emerging and developed market indexes. While the global investment landscape remains uncertain, it’s essential to dissect the factors contributing to this decline and identify potential opportunities within the region.
A regional overview: in the red
Within Latin America, all countries reported negative returns in USD. Colombia took the lead with a substantial -12.9% decline, followed closely by Brazil (-8.8%) and Chile (-7.1%). Peru (-5.4%) and Mexico (-4.4%) also faced headwinds in August, reflecting the overall turbulence in the region.
Valuation metrics: a glimpse into opportunity
Amidst the challenging landscape, valuation metrics provide a glimpse of potential opportunities. The MSCI Latin America Index is currently trading at a price-to-earnings (P/E) forward ratio of 8.8x, which stands 36% below the last five-year average of 13.7x. Furthermore, it remains 35% below the Emerging Market Index (MXEF). This disparity suggests a potential value play for investors looking at the long-term growth prospects in the region.
Risk and reward: assessing the premium
Investors must consider risk premiums when evaluating their options. The risk premium of the MSCI LatAm index against the 10-year USD note (GT10) increased by 50 basis points MoM, reaching 7.6%. This premium remains above the last five-year average of 5.6%, emphasizing the higher risk associated with investing in Latin American equities.
Regional top picks: navigating the terrain
In this challenging environment, it’s crucial to identify sectors that show resilience and growth potential. Our top picks in the Latin American region currently favor companies in the Consumer Non-Cyclical sector, including Cencosud, InRetail, Hapvida, and Becle.
Country-Specific Insights:
- Brazil: Expectations of a reduction in the basic interest rate to 8.75% p.a. by the end of next year, coupled with a decrease in inflation, bode well for the family budget. This, in turn, supports the estimate of an improvement in domestic demand over the coming quarters.
- Chile: Positive inflection points in July’s activity figures have sparked optimism. We anticipate that the BCCH authorities will continue their cycle of rate cuts, potentially reaching a range of 8.0% to 7.5% by year-end.
- Colombia: Cautiousness prevails due to political and regulatory uncertainties. Additionally, there is close monitoring of any potential reclassification of Colombia from an emerging to a frontier market by MSCI, following JP Morgan’s recent comments that have impacted the market.
- Mexico: Persistent inflation concerns are likely to keep Banxico’s stance unchanged in the upcoming meetings. However, we anticipate the Central Bank initiating rate cuts by the fourth quarter of 2023 to prevent overly restrictive conditions.
- Peru: The El Niño Phenomenon has affected agricultural product harvests. Despite this, we expect inflation to meet our year-end estimate of 5%, which supports the beginning of interest rate reductions by the central bank this month.
As investors navigate the challenges in LatAm equity markets, it is crucial to maintain a balanced perspective, considering both the risks and potential rewards that this dynamic region offers. Opportunities exist, but thorough research and careful consideration are essential in these uncertain times.
