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.
--With assistance from Maria Elena Vizcaino.
This article was provided by Bloomberg News.