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September 17, 2018

What’s next for Latin America?


If you’re an investor, there’s a lot to fret about in Latin America right now. NAFTA’s future is up in the air. The region’s two largest economies–Mexico and Brazil–have elected or are likely to elect populist presidents. Argentina is struggling with a massive financial squeeze and a run on its currency. Venezuela’s terrible humanitarian crisis has led to riots and massive emigration into neighboring countries.

Complicating matters is the strengthening U.S. dollar, which has put pressure on the cost of financing economic growth and on stock prices. You can see the impact of the latter in the charts below, which compare hedged and unhedged versions of the iShares MSCI Mexico ETF (EWW, HEWW) with the broad iShares MSCI Emerging Markets  ETF (EEM, HEEM). 
Performance data represents past performance and does not guarantee future results. Investment return and principal value will fluctuate with market conditions and may be lower or higher when you sell your shares. Current performance may differ from the performance shown.    
Performance data represents past performance and does not guarantee future results. Investment return and principal value will fluctuate with market conditions and may be lower or higher when you sell your shares. Current performance may differ from the performance shown. 
Here’s the question: Is it time to step away from the region, or should you stick with it and climb the wall of worry until the situation improves?

Shifting spheres of influence

That was the crux of a discussion I recently moderated, with a panel of experts that included Axel Christensen, BlackRock’s chief investment strategist for Latin America and Iberia, and several asset allocation specialists. Together, they provided a rich perspective on how they’re thinking about the region. Here are the main takeaways:

1. Brazil may be oversold.

We routinely forget that Brazil is the size of the continental United States. And, similarly, it has a vast array of sub-economies and growth opportunities dispersed across a large landmass. All of our panelists agreed that Brazil currently appears to represent Latin America’s most attractive investment opportunity. Despite the political turmoil (former president Lula da Silva is campaigning from prison), the central bank has managed to keep the currency relatively stable and inflation within a reasonable range.

2. China’s influence is strong in the region.

China has long looked to South America for its natural resources, and its influence could grow, particularly amid the current trade reshuffling. To take just one example, China’s new tariff on U.S. soybeans could be a boon for Brazil’s agricultural sector.

3. Domestic investors are having their say.

Equity markets in Latin America have traditionally been driven by foreign investors, but that balance is changing as the domestic investment culture grows. Local market participants, who have more skin in the economic game, are adding new perspectives and pricing information to the mix. That diversity of interests can present opportunities.

4. From an investment perspective, there is no “Latin America.”

Stock prices in individual countries may move in lockstep for short periods, but they’re ultimately driven by distinct economic and political forces. As a result, it may make sense to view a region through a refracted lens.
This is true not just for Latin America, but for emerging markets overall. For example, a long-term holding like the iShares Core MSCI Emerging Markets ETF (IEMG) gives you comprehensive EM exposure in a single transaction. That type of broad exposure is critical for broad portfolio diversification, but it represents 24 economies, each developing at vastly different rates: think China (31% of the index, as of July 31) vs. Peru (<1%). So complementing the core with single country funds is an almost instant way to express a markets-driven view on an economy that might otherwise get lost in the broader mix.
The good news is that ETFs can help you get even more granular with your exposures, whether it’s the iShares MSCI Brazil Small-Cap ETF (EWZS) or the factor-based iShares Edge MSCI Min Vol Emerging Markets ETF (EEMV). Think of them as precision hardware if you decide to climb that wall of worry in uncertain times.
Martin Small is the Head of U.S. iShares and a regular contributor to The BlackRock Blog (more by BlackRock here).  
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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