• York Investment & Finance

Global Markets Overview: Latin America

By Tom Ives, Analyst at the York IFS Global Market Telegraph

Latin American equities climb higher on vaccine news, Brazilian software firm TOTVS lose out on acquisition target Linx SA and Petrobras look set to capitalise on changing crude demand.

Latin American equities have traded their strongest week since early June after Pfizer recently announced they would provide Brazil with millions of doses of a COVID-19 vaccine in 2021. Equities also rose when Moderna Inc became the second US drug maker to declare positive results surrounding a potential vaccine. Optimism surrounding the announcement sparked a global rally as investors wagered on a swift economic recovery to the pandemic following the news that their experimental vaccine was 94.5% effective in treating COVID-19[1].

Growing risk appetite has resulted in large capital flows back into Latin American markets during the past few weeks, and the MSCI Latin America index now looks set to capitalise on this recent momentum after the benchmark index soared 4.6% on Monday alone[2]. The recent upturn in coronavirus cases and lingering doubts surrounding the timescale of the future vaccine have led to a pause in other global markets. However, strong fundamentals and cheap lending rates resulting from extensive stimulus measures have allowed regional equities to extend gains further, with the index now reaching its highest level in 8 months.

Investors have flocked into both the Brazilian Ibovespa Index and the Brazilian Real this week after the nation reported strong retail sales as economic activity continues to recover in Brazil. When the pandemic started to ravage the Brazilian economy, the value of the Real began to plummet with the currency already struggling to endure the sluggish growth in Brazil prior to the pandemic. Although the currency is currently valued 30% lower against the US dollar YTD, investors see the merits of one of the worst-performing currencies in the region. With Brazil holding impressive reserves and possessing manageable levels of long-term debt, the Brazilian Real shows much promise for those looking to diversify their portfolio as risk sentiment grows on the back of the vaccine.

Brazilian software company TOTVS shares have plummeted by 8.9%[3] this week after Stone Co made significant headway in their attempted acquisition of Brazilian software firm Linx SA. TOTVS shares initially edged higher last week when Linx advised shareholders to reject advances from Stone Co in favour of TOTVS. However, the recent optimism ended abruptly after shareholders agreed to a takeover bid from rival firm Stone Co. The potential acquisition has been a contentious issue since the bidding war commenced in August; and if antitrust regulator CADE approves the deal, it could have a profound effect on the Brazilian tech market.

The Argentinian S&P Merval index bucked the trend of its regional counterparts as investors have become increasingly frustrated at recent decisions made by the government. The resolution of longstanding issues surrounding sovereign debt in August looked to be a huge milestone for the nation, however, tensions in Argentina escalated after the government imposed restrictions on capital flows and announced further delays in repaying its sovereign debt.

The rise in the price of crude oil has consolidated the prospects of the region’s major energy stocks, most notably state-owned Brazilian oil exporter Petrobras, whose shares have climbed 10% higher this week.[4] Demand is expected to return to pre-pandemic levels, provided a potential vaccine can be distributed effectively. Despite heightened geopolitical uncertainty and the pandemic weighing heavily on oil demand and prices, investors can take confidence in the firm’s strong performance even during uncertain times for the industry. The firm has overcome the major headwinds posed by the pandemic, as the growing popularity for sweet medium grade Lula and Buzios crude oils has resulted in Brazil taking a commanding position in the crude market.

Despite sharply weaker oil prices in the market in general, the soaring demand has resulted in the price for those medium grade oils exceeding the price of Brent traded in the Chinese market. If demand can be sustained, analysts claim that they could become the most expensive crude oil varieties worldwide.

Petrobras has also profited from a change in maritime regulation, which has resulted in a surge in demand from Asian refiners. The regulation, known as IMO 20, states that the maximum percentage of sulphur content allowed for maritime fuels will now be capped at 0.5% instead of 3.5%.[5] The amendment to maritime fuel legislation will put the firm in a prime position to take advantage of the sustained demand for their light sweet grades of crude oil.

This article was first published in the University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 12.1 in late November 2020.

Reference List

[1] https://www.ft.com/content/9d7a2e24-aea0-4c45-82ab-509dc80ed5a1 [2] https://www.marketwatch.com/investing/index/892000?countrycode=xx [3] https://finance.yahoo.com/quote/tots3.sa?ltr=1 [4] https://finance.yahoo.com/quote/PBR/ [5] https://www.spglobal.com/platts/en/market-insights/latest-news/shipping/102820-scrubber-uptake-clouds-incentive-for-low-sulfur-marine-fuel-production-concawe

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