Latin American countries are at the whim of the strengthening US dollar and the dire outlook for commodities prices. These factors go some way to explaining the underperformance of the region in the past year, but there are other factors weighing down sentiment.The MSCI Emerging Markets Latin America index lost 27 per cent in 2015, while the MSCI Emerging Markets index was down just 10 per cent, data from FE Analytics shows. It was Brazil that dragged the region down, with the MSCI Brazil index shedding around 40 per cent.
With the exception of Greece, Brazil was the worst-performing market last year, an annus horribilis in which it also lost its investment-grade credit rating by Fitch, notes JPM Latin America Equity fund manager Luis Carrillo.
The country is in the midst of an economic and political crisis. The hugely unpopular president Dilma Rousseff has been caught up in a scandal surrounding state-owned oil company Petrobras, and rumours of her impeachment abound.
Mr Carrillo says: “The recent replacement of Brazil’s austerity-minded finance minister suggests a waning commitment to necessary reforms in order to shore up support for the president’s more left-leaning party in Congress.”
Oliver Leyland, senior investment analyst for Latin America at Hermes Investment Management, predicts a multi-year recession in the country.
He explains: “You do have this horrible scenario of low or negative growth, [and] high inflation still. You have this huge and ballooning fiscal deficit as well, which is a problem. So spending cuts are necessary, but they’re not coming through because of this political paralysis.”
In economic terms then, Brazil appears to have fallen behind its Bric (Russia, India and China) peers. But Mr Leyland believes the country’s institutional framework is performing well compared with the other Bric nations.
Alfredo Mordezki, head of Latin American fixed income at Santander Asset Management, is positive for other reasons.
He notes: “Brazil has a strong domestic market [the biggest in the region], its external sector is improving after the adjustment of the currency and it still holds some world-class companies in sectors that did well in the current environment, like food companies, or pulp and paper producers. Fiscal policies may become more neutral in the second part of 2016 and, if inflation expectations correct, monetary policy can become less of a hurdle.”
But he thinks any potential recovery in Brazil will be a 2017, not a 2016 story.
Another cause for concern is Peru, which may be downgraded to frontier market status this year over concerns it does not have sufficient investable companies.
Meanwhile, Argentina has been one of the best-performing countries in the region, with the MSCI Argentina index up 9.8 per cent in the year to January 28 2016. The country swore in new president Mauricio Macri in December last year, replacing Cristina Fernández de Kirchner.
Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Asset Management, notes the new administration is “market friendly”. He says: “Regime change can be very powerful – it’s one of the reasons why Argentina was a big outperformer. Venezuela is another example of that.”
But Mr Gutierrez believes Mexico – the “poster child for reform” – has been a disappointment, blaming the falling oil price. “It has been this great reform story, but the oil situation has complicated things for Mexico. When you look at total oil products including refined, it’s now an oil importer because it imports refined products from the US, though oil exports are still a big part of revenue for this government.”
As Mr Leyland points out: “Eighty per cent of Mexican exports go to the US. So the relatively steady recovery in the US economy is positive for the country.
“Equally, Mexico just has a better economic framework [than other Latin American countries] – unemployment and inflation are both quite controlled, the central bank is credible, and there’s no real issue with leverage levels either at the corporate or household level.”
Invesco Perpetual head of emerging equity markets Dean Newman also sees opportunities in Mexico, which he says has a robust manufacturing sector.
“We are impressed that president [Enrique Peña] Nieto has followed through on his 2012 campaign promise to overhaul the country’s energy sector, which has been opened up for international investment for the first time in more than 70 years,” Mr Newman notes.
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