After 73% Collapse, Latin American Stocks Finally Start to Soar

(Bloomberg) -- For over a decade now, investors in Latin American stocks have watched the value of their portfolios slowly shrivel away. From the peak, back in the go-go-days of early 2008, to the trough at the start of the pandemic, the MSCI regional benchmark index fell an astonishing 73% in dollar terms.

Now, 14 years after that all-time record was set, the market is finally starting to show signs of life again.

The spark is the same today as it was then: a boom in global demand for the region's exports of oil, copper, soybeans, corn and iron ore. Russia's invasion of Ukraine only further squeezed global supplies of key commodities, pushing up prices more and generating a steady stream of dollars that is breathing life into long-stagnant economies from Mexico to Brazil.

The result: The MSCI's regional index, known as MXLA, has jumped 26% in the first quarter, its best start to a year since the early 1990s. The returns look all the more impressive when compared to those from the U.S. stock market, down 4.9%, Western Europe, down 6.6%, and emerging-markets overall, down 7.4%.

It's a little bit of payback for the contingent of Latin American diehards who've endured year after year of losses -- or marginal gains -- while stocks across the rest of the world have soared. And it's a sign that if the current commodities rally is really the beginning of the second super-cycle of the century, as many experts believe, there are potentially a lot more gains to come.

“We are still positive on the region,” said Pablo Riveroll, the head of Latin American equities at Schroders in London. The jump in commodity exports, he notes, is shoring up the region's wobbly currencies, swelling fiscal coffers and helping tame an inflation outbreak that's cut into consumers' purchasing power. Stock valuations “are still attractive,” he says.

The gains are coming from all across the region.

In Brazil, the benchmark index is up more than 34% in dollars in the quarter. In Chile, Colombia and Peru, they're up more than 20%. Banks, miners and oil drillers are leading the way. Even in long-struggling Argentina, stocks have eked out a 1% gain. Riveroll is bullish on the country, saying he sees “some deep value” there.

Argentina perhaps best represents the economic morass that set in across the region when the last commodities boom when bust a decade ago. Recessions piled up, currencies sunk and poverty mounted -- and all that was even before the pandemic hit. Some began to refer to it as another Lost Decade for the region.

Another reversal in commodities could, of course, snuff out the nascent momentum building in the region's economies and, by extension, in stocks too.

But for a growing number of investors and analysts, cheap stock valuations make the risk worth it. The MXLA index trades at 8.5 forward earnings, below its 10-year historical average of 12.7 times, Bloomberg data show.

The region “looks set to embark on a new growth upcycle,” Bank of America strategists led by David Beker wrote in a report last week.

Brazil Leads

Foreign investors have driven the rally in Brazil, the biggest market in the region, pouring 90 billion reais ($19 billion) into stocks in the first three months.

The Ibovespa equity index is expected to gain a further 8% by year end to 130,000, according to the median estimate of a Bloomberg survey of 13 professionals. Their targets range from 115,000 to 144,000.

With central bank chief Roberto Campos Neto now talking about ending the rate-hiking cycle in May, investors are debating whether it's time to rotate away from commodity-linked names that have led gains toward stocks more exposed to the domestic economy.

“We don't want to overstay our long position in commodity producing stocks” in Brazil, Morgan Stanley strategist Guilherme Paiva wrote in a report earlier this month. Risky assets should benefit from a “relatively orthodox macro economic policy plan” and the start of a monetary easing cycle after the election later this year, said Paiva, who has favored Brazil and Chile within the region.

Lingering Risks

Something similar has happened in Chile, where most of the rally was explained by lithium producer SQM SA, which received a boost from the war as people focus on electromobility options, said Gutenberg Martinez, investment manager at Santiago-based asset manager Quest Capital.

Further gains may be more difficult, though.

Investors in Chile are switching their attention to political risks, with Chile rewriting its constitution and debating proposals such as the nationalization of the mining industry. The charter is scheduled to be presented by July 5 with a referendum to follow later. In Brazil, attention may move to October's presidential elections.

With risks mounting, future gains in the region may depend on commodities.

“The near term outlook is fairly binary” for the region, said Malcolm Dorson, a portfolio manager at Mirae Asset Global Investments in New York.

“If commodity prices hold up, Latin American equity markets should continue to receive support from earnings growth, currency strength, and flows,” Dorson said. “If we see a significant reduction in geopolitical tension,” then the more liquid, large-cap names may reverse some of the recent strength, he said.