Why We Remain Neutral on Latin America

Transcription

1 Peter Donisanu Investment Strategy Analyst WEEKLY GUIDANCE ON ECONOMIC AND GEOPOLITICAL EVENTS Why We Remain Neutral on Latin America November 27, 2018 Key takeaways» Latin American equities have outperformed their emerging market peers this year.» While improving fundamentals are supportive of Latin American risk assets, we view this year s run up in equity market prices likely to have been influenced by optimism surrounding general elections. What it may mean for investors» Given the complex nature of policy implementation coupled with international uncertainties relating to ongoing geopolitical risks, we continue to argue for balanced Latin American exposure relative to emerging markets as a whole. Risk assets in Latin America have outperformed their emerging market peers this year on stronger fundamentals coupled with optimism surrounding presidential elections in Mexico and Brazil. While we expect Latin American fundamentals to continue improving, we anticipate risk assets in the region to moderate in the coming months as investors pause to assess the policy landscape domestically and abroad. Chart 1. WFII Economic Diffusion Indices Economic conditions on the rise in Latin America Feb-14 Apr-14 Jun-14 Index level Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Total select advanced economies Total select emerging economies Latin America Sources: Wells Fargo Investment Institute, Bloomberg, November 13, Data reflects WFII Economic Diffusion Index calculations. A level above zero suggests that economic conditions are better today than they were three years ago. WFII Economic Diffusion Index is a composite measure of changes in a given country's key economic metrics relative to a rolling five-year rolling lookback period. Metrics tracked include labor and productivity, trade, inflation, monetary conditions and consumer spending. MSCI Emerging Markets (EM) Latin America Index captures large and mid-cap representation across 5 Emerging Markets (EM) countries in Latin America. With 114 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results Wells Fargo Investment Institute. All rights reserved. Page 1 of 5

2 Improving economic conditions Various indicators for Latin America s largest markets suggest that the economic malaise that had gripped the region in recent years is giving way to a rebound in household spending and corporate investment. This improvement has been led by rising consumer and business sentiment and is evident in this year s corporate earnings resurgence. Earnings among Latin America s largest publicly traded companies has more than doubled from a mid-2016 low. This improvement has been attributed to a rebound in materials-oriented and financial-sector-based companies. Looking forward, consensus expectations for corporate earnings growth are set to continue at a double-digit pace into the coming year, which is supported by a generally positive economic outlook for the region. Policy headwinds likely to continue Improving fundamentals are supportive of Latin American risk assets. However, we view the run up in equity market prices this year likely to have been influenced by optimism surrounding general elections (more so in Brazil than in Mexico) a trend that we have seen in previous elections. As a result, we expect Latin American markets to experience a post-election pullback in the coming months. Chart 2. Equity market performance in Mexico and Brazil tend to waver following presidential elections = Headline equity market index value the day before elections Number of days before/after Election Day Election Day Mexico (2012) Mexico (2018) Brazil (2014) Brazil (2018) Sources: Wells Fargo Investment Institute, Bloomberg, November 13, Mexican Bolsa - The S&P/BMV IPC seeks to measure the performance of the largest and most liquid stocks listed on the Bolsa Mexicana de Valores. The index is designed to provide a broad, representative, yet easily replicable index covering the Mexican equities market. The constituents are weighted by modified market cap subject to diversification requirements. IBOVESA - Ibovespa Brasil Sao Paulo Stock Exchange Index is a gross total return index weighted by free float market cap & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. It has been divided 10 times by a factor of 10 since Jan 1, 1985:12/02/85, 08/29/88, 04/14/89, 01/12/90, 05/28/91, 01/21/92, 01/26/93, 08/27/93, 02/10/94, and 03/03/97. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results Wells Fargo Investment Institute. All rights reserved. Page 2 of 5

3 Investment implications Improving economic and earnings fundamentals in the region remain supportive of Latin American risk assets; yet, we continue to view equity markets as susceptible to heightened levels of volatility as it relates to policy risks domestically (Mexico and Brazil in particular) and abroad. This has become apparent as some investors have begun paring market exposure to Mexico based on uncertainties surrounding the incoming President Andrés Manuel López Obrador s (AMLO) future policies. In contrast, flows into Brazil have increased based on speculation that President-elect Jair Bolsonaro will be able to push through much needed economic reforms. Yet, as many democratically elected presidents find post-inauguration day, stumping on policy versus actually getting it implemented are two very different tasks the results of which tend to weigh on market performance. We believe these domestic realities coupled with international uncertainties relating to U.S.-China trade negotiations, Brexit, and other geopolitical risks continue to argue for balanced Latin American exposure relative to emerging markets as a whole Wells Fargo Investment Institute. All rights reserved. Page 3 of 5

4 Economic Calendar Date Country Report Estimate Previous 11/27/2018 IT Manufacturing Confidence y /27/2018 SK Manufacturing /27/2018 AU Construction Work Done % 11/28/2018 GE GfK Consumer Confidence /28/2018 JN Retail Trade YoY % 11/29/2018 US PCE Core YoY % 11/29/2018 US Real Personal Spending % 11/29/2018 US Bloomberg Consumer Comfort /29/2018 US Pending Home Sales MoM % 11/29/2018 US Pending Home Sales NSA YoY % 11/29/2018 US FOMC Meeting Minutes /29/2018 EC Consumer Confidence /29/2018 CH Manufacturing PMI /30/2018 US Chicago Purchasing Manager /30/2018 EC CPI Estimate YoY % 12/2/2018 JN Nikkei Japan PMI Mfg /3/2018 US Wards Total Vehicle Sales m 12/3/2018 US Markit US Manufacturing PMI /3/2018 US ISM Manufacturing /3/2018 US Construction Spending MoM % 12/3/2018 US ISM Prices Paid /3/2018 US ISM New Orders /3/2018 US ISM Employment /3/2018 EC Manufacturing PMI /3/2018 AU RBA Cash Rate Target 1.50% 1.50% 12/4/2018 EC PPI YoY % Source: Bloomberg as of November 27, Wells Fargo Investment Institute. All rights reserved. Page 4 of 5

5 Risk Considerations Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. General Disclosures Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. The information in this report was prepared by Global Investment Strategy. Opinions represent GIS opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR Wells Fargo Investment Institute. All rights reserved. Page 5 of 5