Investors still look to LatAm despite political ‘pink tide’
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FILE PHOTO: Brazil’s President-elect Luiz Inacio Lula da Silva meets Argentina’s President Alberto Fernandez, in Sao Paulo, Brazil October 31, 2022. Esteban Collazo/Argentine Presidency/Handout via REUTERS
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By Lisa Pauline Mattackal and Anisha Sircar
(Reuters) — A wave of leftist political victories in Latin America’s biggest economies is unlikely to hurt investments in the region given divided legislatures and strong performance of their stock markets, fund managers told the Reuters Global Markets Forum.
Latin American stocks have risen over 8% this year, significantly outperforming a broader index of emerging market shares which is down 29%.
«Investment has not suffered particularly badly in comparison with other regions in emerging markets and LatAm feels like a more traditional emerging market investment right now as a result,» said Daniel Wood, emerging market debt portfolio manager at William Blair Investment Management.
Among LatAm currencies, Brazil’s real is the best performer this year, up around 9%. It has added another 3% in gains after President Luiz Inacio Lula da Silva’s election, as investors cheered easing of political uncertainties.
«We should expect a pragmatic fiscal policy with just a moderate expansion in government spending,» said Silvio Cascione, Brazil director at Eurasia Group, adding that Lula was likely to include market-friendly picks in his administration to burnish credibility with investors.
Graphic: LatAm stocks vs EMRG benchmark — https://fingfx.thomsonreuters.com/gfx/mkt/egvbynwxmpq/Pasted%20image%201667546205046.png
Lula’s win over Jair Bolsonaro in Brazil’s presidential elections consolidates a new «pink tide» in Latin America, with the left governing the region’s major economies from Mexico to Argentina.
However, political divisions have kept a «balance» in Latin American policy decisions and prevented economic reforms from being overturned, Wood said.
Alejo Czerwonko, chief investment officer, emerging markets Americas for UBS Global Wealth Management, said he expects Brazilian equity markets, which have jumped 11% this year, to outperform other emerging markets given factors including high commodity prices, attractive valuations and relatively low vulnerability to tighter global liquidity.
Even with the jump in valuations, Brazilian stocks remain cheap — investors in the MSCI Brazil index pay some $6 for every $1 in earnings, compared to nearly $18 at a 2020 peak.
Czerwonko said he favors petrochemical and commodity producers with global scale, national oil companies and low-cost mining companies that benefit from cleaner hydropower as a source of energy.
Environmentally friendly development is a key priority for Lula’s administration, with proposals including fighting deforestation, subsidizing sustainable farming and reforming Brazil’s tax code to usher in a green economy.
Wood said he likes Brazilian local-currency bonds given their attractive yields, and that the Brazilian central bank’s decision to begin hiking interest rates earlier to combat inflation has placed the economy in a relatively strong position.
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