Opportunities on the Horizon: Investing Through a Slowing Economy

Regional Previews | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 67 6.3 Latin America: Favorable financial conditions, cautious central banks 1 Source: Bloomberg as of June 1, 2023 2 Source: Bloomberg as of June 2, 2023 JORGE AMATO Head of Latin America Investment Strategy We see selective opportunities across Latin America as central banks are likely to begin easing cycles in 2023. Brazil is likely to benefit from the rebound in China. Latin America’s largest economies are set to slow down in 2023. Much like the rest of the world, Central Banks in the region have tightened monetary policy to battle inflation. However, their actions were swifter and more effective than in developed economies. As a result, inflation in the region has been decelerating. While we anticipate more favorable financial conditions ahead, the Latin American central banks are likely to remain cautious. Consensus growth for the region is below 1% this year, down from about 3.7% in 2022. On the political and structural reform fronts, populist governments have been less destabilizing than markets feared, stemming capital outflows to some extent. Local currencies have been very resilient thanks to the combination of high local interest rates and receding inflation ( FIGURE 1 ) . This has supported local debt markets, as reflected by the 14.6% year-to-date gain in the Bloomberg LATAM Local Debt Index. 1 Mexico , with its close ties to US industry and demand, has been a beneficiary of geopolitics and the surprisingly resilient US economy. As US companies move operations closer to home, “nearshoring” has translated into strong capital inflows for Mexico and remittances are correspondingly robust. Capital investment is on the upswing and consumer confidence remains firm. This positive macro environment has not gone unnoticed by investors. The Mexican peso is up 11% and the Mexican stock market has returned a stellar 20% in US dollar (USD) terms, year-to-date. 2 Given our expectations of a mild US recession, we find Mexican markets to now be a momentum play, with limited incremental value at current levels.