Stocks in Latin America – Outperforming in 2022 ?!

Summary

It has been a very challenging year for US stocks and elsewhere around the world.

However, a bright spot exists: Latin America is an upside outlier. Yes – Latin America. And this comes after a collapse of more than 70% between early 2008 and the trough at the start of the pandemic.

The rally is being driven largely by commodities.

I continue to favor Brazil and Chile despite political risks.

ILF – iShares Larin America 40 ETF is up nearly 9% year-to-date. Now, fourteen years after the all-time record was set for the MSCI regional benchmark, the market is finally starting to show signs of life again.

ILF’s performance is more striking in relative terms. Comparing the fund against US stocks (SPY) and global equities overall (VT) is a study in sharp contrasts. Indeed, both SPY and VT are deeply in the red so far in 2022, both tumbling more than 20%.

The gains are coming from all across the region of Latin America. In Brazil, the benchmark index is up more than 30% in dollars in the past two quarters. Chile, Colombia and Peru are up more than 20%. Banks, miners and oil drillers are leading the way.

Even in long-struggling Argentina, stocks have eked out a 1% gain.

Any Risks? Another reversal in commodities could stifle the nascent momentum building in the region’s economies and, by extension, in stocks too. If commodity prices hold up, Latin American equity markets should continue to receive support from earnings growth, currency strength, and flows. If we see a significant reduction in geopolitical tension, then the more liquid, large-cap names may reverse some of the recent strength.

But for a growing number of investors and analysts, cheap stock valuations make the risk worth it. The MXLA index trades below its 10-year historical average of 12.7 times.

Stocks across other parts of the world also tell a similar story. Take a look at the Vanguard Total World Stock Market (VT).

What’s Driving the Market in Latin America?

It’s really a combination of (1) higher commodity prices and also (2) attractive interest rates. Brazil makes up nearly two-thirds of ILF’s country weights, followed by Mexico with 20%-plus. By sector, financials are the leading allocation (30%), followed by materials (24%) and energy (15%).

Brazil’s central bank hiked interest rates early, and continued raising its target rate in August to 13.75%. Despite a surging US dollar this year, this supported the local currency, the Brazilian real.

A Boom in Global Exports

There has been a huge demand for oil, copper, soybeans, corn and iron ore. This has been further exacerbated by Russian’s invasion of the Ukraine.

The MSCI Emerging Markets (EM) Latin America Index captures large and mid cap representation across 5 Emerging Markets (EM) countries* in Latin America. With 90 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI’s regional index, known as MXLA, has jumped more than 30%, its best start to a year since the early 1990s. The returns look all the more impressive when compared to those from the U.S. stock market, down 4.9%, Western Europe, down 6.6%, and emerging-markets overall, down 7.4%. 

The ILF continues to hold onto its summer rally.

Ten Latin American Stocks to Consider

Traditionally Latin America’s markets are regarded as commodity plays. However, some fund managers’ biggest bets in the region tell a different story.

What about the S&P Latin America 40?

The S&P Latin America 40 includes 40 leading, blue-chip companies that capture approximately 70% of the region’s total market capitalization.  Constituents are drawn from five major Latin American markets: Brazil, Chile, Colombia, Mexico and Peru.