• York Investment & Finance

Global Markets Overview: Latin America

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

“Investors pile into EM assets as Latin American equities and currencies enjoy a record-high November and rising Chinese demand overshadows Vale’s recent shortcomings”

Positive manufacturing data from China and further vaccine developments have kept the bullish run alive for Latin American equities, with the regional benchmark index now recording its fourth successive weekly rise. Latin American stocks and currencies have become the latest beneficiaries of widespread optimism worldwide, as investors search for ‘riskier’ assets at the expense of the greenback and low-yield US treasury bonds.

Equities have extended the record-breaking gains from September after breakthroughs in the search for a vaccine and the recent stabilisation in US politics fed optimism into the global economy. The end to a fiercely divided election run-in is now well underway with Donald Trump finally coming to terms with the US presidential victory for Joe Biden. Investors believe that normality will resume again following what can only be described as a tumultuous year for the US.

However, as confidence returns to the US economy, sizeable devaluations are expected for the US dollar. When the pandemic brought the world to a standstill in March, investors piled into the dollar with the greenback perceived as a ‘safe-haven’ asset during times of economic uncertainty. However, when an economic recovery is on the cards, especially from a black swan event of this size, investors will instead pursue stocks that promise higher returns at the expense of the US dollar. Even with the rally in the dollar at the height of the pandemic, it has already struggled this year and is currently trading at its lowest level since April 2018. Analysts forecast that further deprecations lie ahead especially as the Fed will most likely be reluctant to tighten monetary policy in the foreseeable future, which will probably result in high rates of inflation that will subsequently place further pressures on the dollar.

The key takeaway from this is that weakness in the US dollar is one of many factors that makes Latin American assets more appealing. The currency depreciation will weigh on the net sales for the region’s largest firms, who rely on exports to the US as a major revenue stream. However, the markets look set to gain from the influx of foreign direct investment seen over the past month into the region. Investors have now returned to emerging market assets following the record levels of capital flight seen in March. The mass sell-off, which amassed to around $90 billion according to the IMF[i], had a substantial toll on economies already devastated by the virus. Regional asset prices fell by over 55% during this time period and haven't really recovered to pre-March levels, despite a rebound over the past months. The fundamental value of regional currencies and stocks are currently not priced in the prevailing market price and therefore they remain massively undervalued. Experts argue that this presents a substantial opportunity for investors who are willing to seek out high returns.

Both Mexico and Brazil are in a strong position to capitalise on the so-called “snapback potential” for emerging market assets in the upcoming months, as quoted by Goldman Sachs. After much anticipation, Mexico finally introduced stimulus measures in the later stages of August and they have impressively managed to keep inflation low to mitigate the risk of overheating the economy. The low levels of inflation provide the nation a large scope for additional expansionary policies to be implemented. This could help Mexico capitalise on a massive re-haul in US foreign trade policy, provided that Joe Biden can overcome the issues imposed by the potentially Republican-dominated Senate. Brazil can also profit from the large anticipated rise in commodity prices, provided the Covid-19 vaccine can be successfully distributed in 2021.

The share price for mining giant Vale has slipped by over 2% after the firm lowered its output targets to 315-335 million tonnes of iron ore for 2021, well below the forecasted market estimate of 353 million tonnes. This is the latest of a string of bad news for Vale, following their announcement that they expect to miss their revised 2020 target by another 10 million tonnes[i]. This will only exacerbate issues for the firm brought upon by the court ruling last month which imposes restrictions on their future output.

Despite the firm’s recent shortcomings, it has performed strongly over the past year, with its share price currently up 50% YTD[ii]. It has profited massively from iron ore prices, which are trading 40% higher this year, resulting from a combination of supply shortages worldwide and a sudden surge Chinese demand. The recent Chinese manufacturing data, which has reached a 10-year high in November[iii], suggest that this rise in demand looks to be sustainable over the long run and that Vale’s share price looks set to climb even further over the next year. This could also help accommodate Vale’s push towards renewable energy, as it looks to be powered completely by renewables by 2025.

Reference List: [i]https://uk.reuters.com/article/vale-strategy/update-3-brazils-vale-output-goals-lag-forecasts-sets-emission-targets-idUKL1N2II12Q

[i] https://www.ft.com/content/37db80cf-a352-4790-8e80-10a8c76e63af [ii]https://finance.yahoo.com/quote/VALE/chart?p=VALE [iii]https://markets.businessinsider.com/news/stocks/stock-markets-today-investors-cheer-data-vaccine-rollout-2020-12-1029852575

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