Latin American equity markets were again strong in June, outperforming developed and emerging market indices. The MSCI Latin America Index (MXLA) returned 12.1% in USD terms, outperforming the S&P500 (+6.6%) and the emerging market index (+3.8%).
In Latin America, all countries recorded positive USD returns, led by Brazil (+15.9%), Colombia (+11.7%) and Peru (+11.1%), followed by Chile (+6.9%) and Mexico (+5.8%).
The MSCI LatAm index currently trades at 9.3x P/E Fwd, which is still 33% below the 5-year average (13.8x) and 32% below the emerging markets index (MXEF). The risk premium of the MSCI LatAm index to the 10-year USD bond (GT10) declined 20bp month-on-month to 7.3% and is well above the 5-year average (5.6%).
According to our top LATAM regional picks, we currently favour sectors such as Consumer (Walmex, Cencosud, Inretail), Utilities (Enel Chile, Grupo Energía Bogotá, ISA) and Finance (Banco de Chile, Bancolombia, IFS).
Real GDP grew by 1.9% in the first quarter of this year compared to the fourth quarter of last year, above consensus expectations of around 1.2%. The strong performance of agricultural production drove the result, while domestic demand contracted for the second quarter in a row, which represents a favourable balance for disinflation.
We estimate that the authorities will start their cycle of cuts in the reference rate at their next meeting in July, reducing it by 50 basis points. Thus, by the end of the year, this rate would be around 8.0%.
During July, the market’s attention will be focused on the start of the second legislative period in Congress in which the reforms (pensions, health and labour) will resume their course, perhaps with some modifications to obtain political support.
It is time for the 2Q23 results. Based on our 2Q23 raw estimates, our forecasts point to modest operating growth for the CPI companies. We estimate that revenues and EBITDA could grow between 4% and 6% yoy.
The central bank left its benchmark rate unchanged at 7.75% for the fifth consecutive month. We expect the rate to remain stable in the coming months and foresee between 3 and 4 rate cuts between now and the end of the year, as inflation continues to moderate.