Falling interest rates in the US could give a sizable boost to emerging market economies in the months ahead, none more so than in Latin America, which has some investors excited about the region.
However, Matthews’ chief investment officer Sean Taylor warned investors not to get ahead of themselves, reminding them that much uncertainty lies ahead for Latin America.
Its commodity-driven markets – which are reliant on supportive macro environments – may well perform better when interest rates decline, but they are falling from far higher levels.
The Federal Reserve paused rates at 5.5%, but in countries such as Mexico and Brazil, rates stand 10.75% and 10.5% respectively even after cuts from their central banks earlier this year.
Latin America’s dominance in the commodities space does have its appeals over the long-term – namely its critical role in major industries such as electric vehicles and wind and solar technology – but it will likely be impeded by political volatility in some of its key economies.
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A new left-wing government came to power in Mexico this year and the Brazilian government intervened with state-owned enterprises, stoking concerns over the country’s tax reforms and fiscal controls.
The region’s appeals over the long-term may appear attractive – especially given its much lower valuations not only to global markets, but its own historical prices – but it may be too early to call just yet, according to Taylor.
“Latin American equities are cheap for a reason,” he said. “Many markets are grappling with potentially significant changes in their domestic, political landscapes and almost all of them will be affected, sentiment-wise, by the geopolitical noise generated in advance of the US election in November.
“It will be an uncertain and bumpy road in the coming months. Only when the global monetary environment starts to ease and the domestic and international political dust starts to settle, will the region’s economies and markets have an opportunity to perform at a meaningful level.
“We think this warrants an approach that is conservative in the near term but also positioned to leverage strengthening long-term growth trends.”
