The Latam Case

Recovery, inflation and new economy: the Latam case

It’s easy to say that this past year was a novelty for all of us. The pandemic changed the way we do almost everything and it’s footprint will probably be there for a long time. Every allocator must be now trying to cope with this new world, the recovery after the storm and the shape and velocity of it and which markets should be the winners and losers for the next few months. Let us give you three reasons why we believe Latam is a potential outperformer.

The Mobility argument

Let’s start by noting the most evident of all. Latin American Markets were one of the most affected by this pandemic. It makes sense that a sharp crisis should affect more poorer countries, with higher indebtedness and lower quality institutions, all of which apply for many Latam economies. It’s why it makes sense that these markets have higher beta, and therefore if we expect a recovery they should outperform. This has happened to some extent but there is still a gap of relative return, which has not been the case for mobility, which is similar for many countries in the region, even cases like the US. You can see this spread in the next chart.

We expect that the recovery of the mobility in the region should drive returns. We have spoken with many global investors and I would dare to say that no one was up to date that Chile is in the top 5 countries in terms of vaccinated population. Not only is this the case but also with a very low indebtedness to keep fiscal stimulus if needed. In the case of Brazil and Mexico, even though they are further back the list, mobility has improved a lot, which helps the recovery, employment and therefore consumption.

The commodity call

We have seen for a couple of months already a strong recovery of commodity prices. It started mid last year underpinned by the strong recovery of demand in China. Since then inflation, the Fed policy rate and the US dollar have helped the call as well. We believe most of the reflation trade (where commodities make a lot of sense) is more a normalization call rather that a new inflationary cycle.

Therefore, we are bullish on commodities stocks. On top of this you had a 2020 with a sharp supply side shock which affected inventory levels across the globe for many industrial materials, which takes time to close. Finally, you have the “ESG” argument. The global decarbonization, along with stringent environmental license processes could have a long term impact on supply which could support higher commodity prices for longer than anticipated. But this call is harder to pinpoint in terms of magnitude and timing.

If you agree and you like the commodity call, is hard not to agree that Latam makes sense in the portfolio. Not only there are a lot of names to expose to commodities but also these are economies that benefit directly from higher raw material prices. You can see this in the next chart.

Finally, comparing to Asian markets it’s relatively easy to make the call (not only if you look at valuations) as Latam is a net exporter of commodities while many EMEA countries are importers, therefore can even be affected by this increase in raw material prices, and more affected by global reflation.

The new economy

It’s hard for many clients to believe they can expose themselves to new economy players through Latam, and if they see the ETF I cannot agree more. There are few names to gain exposure to e-commerce, one Fintech and that’s pretty much it. But there are many names that play new global trends that we believe will generate a lot of value in the long term. This companies are in the early stages of development, like it was in the US or Asia more than a decade ago. These names have been one of the main contributors of return for many years now.

Latin-American will always have political noise and we are not saying this is not the case (it´s just a matter of watching the Petrobras case a few days ago) but we do believe the tailwinds are stronger and in many cases the headwinds are already in the prices.