An update from our investment managers, Viktor Szabó and Brunella Isper
29 July 2021
A macro update: Delta & austerity shouldn't derail recoveries in Latin America
The recent economic activity data suggest that the recovery in Brazil has entered a slower phase. That said, with commodity prices still elevated and vaccination progressing rapidly, we still think the recovery has further to run.
Incoming fiscal figures from Brazil have impressed. These have been flattered by some one-offs, and higher interest payments will push up the deficit over the next year or so. Even so, the fiscal data underscore that the public finances are not as bad as many often suggest.
The latest economic activity figures from Mexico suggest that the recovery is broadening out from net trade to domestic demand. The fresh COVID-19 outbreak over the past few weeks (driven by Delta) poses a threat to the recovery, but shouldn’t derail it.
Indeed, while vaccination coverage at the national level is low, it is higher in key economic centres such as Mexico City. And policymakers are reportedly planning to ramp up vaccination in tourist hotspots. As such, while some restrictions may be re-imposed, these are likely to be light touch and most economically important states should remain open for business.
With the region’s recovery grinding on, attention is turning to current account positions and how durable last year’s improvements will ultimately be. In truth, some of the improvement has already started to unwind. And there is so far little evidence of import substitution, with imports rebounding in line with domestic demand.
Meanwhile, although commodity prices are still elevated, copper and Brent crude appear to have come off the boil. That said, the bigger picture is that, unlike at various points over the past decade, balance of payments positions over the next few years shouldn’t be the region’s Achilles’ heel (the key exception is Colombia).
Instead, the key issues are likely to be domestic in nature – namely, the extent of long-term economic damage caused by the COVID-19 pandemic and whether policymakers can avoid a deterioration in economic policymaking (such as a politicisation of central banks).
Latin American equities advanced in US dollar terms in June, ending the first half of 2021 on an upbeat note. Strengthening economic recovery prospects and rallying oil and commodity prices supported the asset class. This offset bouts of volatility mid-month after the US Federal Reserve (Fed) brought forward its timeline to raise interest rates amid inflationary pressures. However, subsequent reassuring comments from Fed chair Jay Powell helped calm some of the jitters and supported flows into Latin American stocks.
Performance across countries and sectors varied considerably. Brazil, the region’s largest market, performed well amid higher foreign inflows and a brightening outlook. The central bank and market analysts raised its full-year growth forecast, after GDP expanded by 1.2% in the first quarter and returned to pre-pandemic levels. Meanwhile, the government unveiled further tax reform plans, including proposals for lower income and corporate taxes and a new tax on dividends. Interest rate hikes also helped to anchor the currency. Some of our more recent initiations, including Sequoia Logistica and GetNinjas, posted robust share-price increases in the period as investors focused on their sound long-term fundamentals.
Meanwhile, technology-linked stocks rebounded on the back of falling bond yields and hopes that accelerating US inflation would prove temporary. The positive sentiment buoyed shares of pan-regional e-commerce giant Mercado Libre, along with Brazilian software company Totvs.
In contrast, Mexican stocks fell due to the Fed’s hawkish shift. However, the central bank’s surprise 0.25% rate hike, reflecting quickening inflation expectations and improving economic data, somewhat boosted sentiment and helped capped losses. Markets there also reacted well to the midterm election results, which saw the ruling party lose some of its majority. This suggests that checks and balances for Andres Manuel Lopez Obrador’s government will remain in place.
Elsewhere, Peru retreated sharply amid uncertainty over the presidential election outcome, with socialist candidate Pedro Castillo appearing to hold a narrow lead. Investors sold domestic assets on worries about Castillo’s pledges to change the Constitution and nationalise the mining sector. Argentina was weak too after index provider MSCI removed its “emerging market” status, citing ongoing capital controls. Analysts believe the reclassification could spark heavy outflows.
In June, we focused on right-sizing positions across the portfolio, including adding back some exposure to Brazil. We added to Petrobras on the back of increased conviction about progress of its divestment strategy and rising oil prices. We also added to Multiplan, taking the view that the mall operator is set to benefit from the sustained re-opening of the economy. Elsewhere we reduced Santander Chile on reduced conviction. We also trimmed railroad operator Rumo, Brazilian drugstore chain operator Raia Drogasil and Walmex following their relative outperformance.
Companies selected for illustrative purposes only to demonstrate Aberdeen Standard Investments’ investment management style and not as an indication of performance.
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