San Jose, Costa Rica – As Latin American governments begin to cut interest rates, investors are taking note of the changing financial landscape in the region. Following Brazil’s recent interest rate reduction in March 2024, Colombia swiftly followed suit by also cutting rates in April of the same year. This trend towards monetary loosening typically correlates with a positive performance in equity markets, although various regional factors also influence overall market trends.
Investors are closely monitoring the iShares Latin America 40 ETF, an exchange-traded fund that focuses on South American equities. This ETF is heavily weighted towards Brazil and Mexico, which together make up over 80% of the fund. In terms of sectors, the fund has significant holdings in financials and materials, with top names including Vale, Petróleo Brasileiro, and Itau. While these companies are listed on the New York Stock Exchange as ADRs, the fund also includes locally listed equities, which carry unique risks related to foreign exchange and local political factors.
Mexico, the second-largest geographical exposure in the fund, is experiencing a notable shift in its economic fortunes. With tensions rising between China and the U.S., American companies are increasingly looking to “near-shore” their supply chains to Mexico. This trend is expected to continue, as evidenced by companies like Tesla considering building new plants in Mexico. The resulting appreciation of the Mexican peso and the outperformance of the equity market indicate the positive impact of this shift.
Furthermore, the iShares Latin America 40 ETF has proven to be a valuable portfolio diversifier when compared to the iShares MSCI Emerging Markets ETF, which has a significant exposure to Chinese equities. The attractive valuation metrics of the fund, with a focus on large value names and an 8x P/E ratio, make it a compelling investment opportunity. Additionally, the high dividend yield of the ETF, mainly supported by financials and energy names, adds to its appeal as an income-generating asset in the emerging markets space.
Overall, the economic resilience and growth potential of Latin American countries, coupled with their increasing integration into the global economy, present a promising outlook for investors. With a supportive macroeconomic environment characterized by a soft landing in the U.S. and lower interest rates locally, the iShares Latin America 40 ETF stands out as an attractively valued option for those seeking exposure to the region’s equities.
