Emerging markets: a focus on Latin America

Brazil, the biggest market in Latin America, is a true economic powerhouse that has what it takes to capitalise on this new global geopolitical order. As a major exporter of soya, iron ore and oil, Brazil has hugely contributed to global consumption, and its growth in 2022 was partly driven by rising commodity prices. This trend has continued in 2023, although its growth outlook is impacted by the global economic slowdown.

Brazil is also set to benefit from the reopening of China, its biggest trading partner. The world’s second-largest economy accounted for more than a third of Brazilian exports in 2021. This fresh momentum could boost Brazilian equity markets, which offer attractive valuations today.

Brazilian monetary tightening is also well underway. After inflation peaked at 12.1% in April 2021 – the highest level in almost 20 years – it fell back to 5.8% in December 2022². Though higher than the central bank’s target of 3.25%, Brazil may be one of the first countries to restore a more accommodative policy, while its policy rate currently stands at 13.75%, offering particularly attractive yields for bond investors:

• With 10-year yields in double digits, significantly higher than US debt, Brazilian sovereign debt offers very attractive real interest rates – among the highest in the world – along with a potential appreciation of its currency.

• As a major financial market in Latin America, Brazil also harbours some attractive credit opportunities, such as B3, the Brazilian stock exchange.

The Mexican economy is forecast to grow by 1.7% in 2023³, mainly driven by domestic consumption and trade with major partners, such as the US.

The drastic health policy imposed by the Chinese government in response to the Covid-19 crisis, together with the resulting supply chain pressures, have considerably impacted trade balances across the world. To allay these difficulties, the principal importer regions – Europe and, of course, the US - have turned to geographically closer countries to diversify their supply chains, a phenomenon known as nearshoring. Europe is relocating its production in Eastern Europe, while the US is massively repatriating its production lines to Mexico.

Besides their geographical proximity, the two regions have strengthened their ties over the years. In 2020, the US was the biggest source of foreign direct investment (FDI) in Mexico, accounting for around 34%⁴. Trade agreements give Mexico preferential access to the North American market. These include the USMCA (United States-Mexico-Canada Agreement), guaranteeing free trade between these countries. In parallel, growing political strains between the US and China have only amplified the nearshoring phenomenon in Mexico’s favour.

On the bond market front, although the Mexican central bank began raising interest rates later than other emerging countries, its policy rate stands today at 11%⁵. The general improvement in Mexico’s fundamentals also make it an attractive issuer.

In these conditions, attractive opportunities can be found in Mexican equity and bond markets to capitalise on this momentum:

• Within equity markets, the bank Grupo Banorte is benefiting from this growing nearshoring phenomenon and offers attractive growth prospects in a still under-penetrated market in Mexico.

• Bond markets offer very attractive real yields, a consequence of the central bank’s fight against inflation, and especially on local debt, which offers close to double-digit interest rates over ten years.