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Latin America has been a relative bright spot in 2022. While the region has not escaped global inflationary pressures, central banks moved quickly on interest rates, which supported currencies across the region. The same time, the region’s abundant natural resources provided a buffer against weaker consumer growth.
While plenty of global economic uncertainty remains, on the BlackRock Latin American trust, we believe the region could be among the first out of the blocks when inflation turns, recovering ahead of many developed markets1.
The immediate advantage for Latin America is that it is further ahead in its interest rate cycle than many other countries. Well-versed in dealing with inflation, its central banks were quick to raise rates2. Brazil, for example, raised its rates to almost 14%3, where they have remained since August. Interest rates operate with a lag, with their economic effect felt in inflation and economic statistics some time after they are implemented4. Brazil and other Latin American countries are closer to a turning point.
The region should also continue to be a beneficiary of higher natural resources prices. It has abundant fossil fuels, which remain in demand as other sources of supply (such as Russia) are cut off. As geopolitical tensions mount, Latin America has been seen as a more reliable long-term trading partner for the West. The region is also a major supplier of copper and lithium. These latter commodities are vital for the energy transition, and are widely used in electric cars and batteries.
These are short-term factors, but there are other factors that suggest long-term strength for Latin America. They should be a beneficiary of deglobalisation5: the disruption to supply chains experienced during Covid has seen many US companies bring manufacturing closer to home and hold higher inventories as they recognise the vulnerability of long, complex, cross-border supply chains.
Latin America’s geographic proximity and manufacturing strength is already seeing its companies benefit from this trend6. Mexico has long been a manufacturing hub for US industry and this may accelerate as companies move away from Asia to Latin America7.
At the same time, there are efforts among Latin American countries to diversify their economies away from natural resources. Brazil’s president Lula da Silva has promised to move Brazil on from being “an eternal exporter of raw materials”8. The country has a good head-start. Brazil is a regional trailblazer on digital payments9, for example. In a recent research paper, the World Economic Forum said: “The explosion of digital payments in Brazil has created an innovative financial ecosystem that works for ordinary people. This progress is the result of a combination of an overhaul in the payments regulatory framework, intensive use of technology, entrepreneurship and a focus on creating products that address the needs of Brazilian customers.”
Brazil also has a vast consumer market – the 10th largest in the world10 - with ecommerce giants such as Alibaba looking to expand in the region11. This is a strong base from which to diversify the Brazilian economy. It should create new opportunities for investors and lead regional development.
In our view, understanding the macroeconomic forces driving Latin America is a crucial part of investing there. At BlackRock, we have built a macroeconomic model that informs our view on individual countries. We want to capture them at the bottom of the cycle, when they are posed for recovery.
Today that leads us to be underweight commodities versus our benchmark (the MSCI EM Latin America Index) and overweight Brazilian domestic growth stories. This includes companies such as Ambev, which – we believe – can gain market share in lower-priced segments and may see falling input costs, or convenience store operator FEMSA in Mexico.
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Trust Specific Risks
Exchange rate risk: The return of your investment may increase or decrease as a result of currency fluctuations.
Emerging markets risk: Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.
Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
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