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David Kimberley
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Updated 17 Feb 2023
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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

The Israeli politician Aba Eban once quipped that his Palestinian counterparts “never miss an opportunity to miss an opportunity.” Investors may be inclined to feel the same way about Latin America.

Rich in resources, immune from many of the world’s geopolitical problems and with large populations to drive growth, there’s always been plenty of reason to be optimistic about countries in the region. Yet the view seems to be that Latin America always finds a way to disappoint.

That’s arguably not an unreasonable view to take if you examine the past decade. Returns for the MSCI Emerging Markets Latin America Index during that time were anemic and below the major UK, US, global and emerging market indices.

Look back over a longer period and you find the region has, on occasion, performed well. Remarkably, looking at the earliest data MSCI quotes in its fact sheets, the Latin American Emerging Market index delivered annualised total returns, in USD terms, of 13.16% from 31/12/1987 through to 31/01/2023. By comparison, the S&P 500 delivered equivalent returns of 10.11% over the same period.

However, it’s worth keeping in mind that Latin America, as with most emerging markets, had a huge number of tailwinds behind it during that time, most notably the opening up of China to the global economy. It is hard to see this being repeated moving forward. Nevertheless, there are some reasons to think the region may perform well in the near term.

One is China’s reopening. Demand for commodities is likely to increase as the country tries to return to normality, something which will be bad for Europe but good for exporters like Brazil, which makes up close to two-thirds of the MSCI Latin America Emerging Market Index’s market cap.

Indeed, according to the Brazilian Ministry of Economy, Brazil posted its largest ever monthly trade surplus with China in November, after the latter country started to reopen.

More Brazilian corn exporters were approved by China in the same month as well according to Reuters, as authorities in the world’s second-largest economy look for alternative sources of the agricultural product, which it used to primarily import from Ukraine and the US.

That points to another potential tailwind for Latin America today. The region has, for the most part, stood aside from the conflict between Western countries and China and Russia. Its ability to export commodities makes it an attractive, neutral territory for buyers around the world as a result.

And there is a lot more than corn to export. South America, most notably in Argentina, Chile and Bolivia, is home to approximately 60% of the world’s lithium deposits, according to the World Economic Forum.

Chile and Peru are also regularly ranked as the world’s first and second-largest copper producers and, according to S&P Global Market Intelligence, mines in those two countries, along with Mexico, produced over 40% of the world’s copper in 2021.

As readers are likely aware, copper and lithium are the key metals needed to produce batteries and other green energy technologies. However, Latin America also holds the largest oil and gas reserves, outside of the Middle East. So as Europeans look for alternatives to Russian hydrocarbons, and the drive for renewables chugs along, Latin America looks set to benefit.

Finally, Brazil and several other countries in the region started hiking interest rates prior to the US to combat inflation. Although it has been a tough couple of years, some countries in Latin America are thus better placed to start cutting rates relative to their peers in the developed world.

Despite these positives, BlackRock Latin American (BRLA), the only trust focused on Latin American equities, is trading at a nearly 10% discount as at 14/02/2023. Again, the volatility and underwhelming performance of the region over the past decade may be hindering investor appetite. But if the positive macro developments described above start to produce meaningful positive results, that sentiment could change. Who knows? Maybe 2023 will be the year Latin America takes the opportunity to take an opportunity.

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