Investors appear to be returning to riskier assets, as seen in the rotation from growth stocks into more cyclical ones at the end of 2020. The asset class remains attractive due to its diverse range of high-quality companies, and structural growth drivers, including healthy demographics and a growing middle class, combined with an increasing number of global leaders, particularly in the technology space.
For example, In Latam we are seeing flows returning to the region gradually and capital market activity is intense. At the time of writing we have over 40 companies lined-up to list its shares in the Brazilian stock-exchange across several sectors.
Latin America is well positioned to benefit from a conducive external backdrop thanks to its inherent exposure to global trade and commodities for most economies. Domestically the region is faced by challenges, however, with definition around congress and senate head out of the way in Brazil, we see a window of opportunity for that agenda to resume. Despite the challenges at the corporate level we remain confident on the earnings recovery as one of the main pillars for investing in Latam and would expect the 4Q earnings season to corroborate that view.
Why do we believe in Latam?
- Latam poised for a rebound – While domestic political noise remains, corporate earnings are recovering on a steady foot, valuations are undemanding and any improvement on external scenario could lead to a rebound for the region
- Covid-19 hit hard but also a catalyst for change – companies were severely hit but many use this a trigger for change with efficiency and digitalization initiatives putting them in a stronger position as economies reopen
- Improving sentiment – Latam is inherently well positioned to benefit from a scenario of improved sentiment towards global trade due to the importance of commodity sector for the underlying economies. ie continue to find interesting ideas within e-commerce and digitalisation trends which are not represented in the index. 40 companies lined-up for IPO in Brazil.
- Long term thesis intact – young, growing populations with increasing wealth and underpenetrated sectors translates to an enormous opportunity to find quality companies to tap into long-term growth potential
Vaccine developments and conclusions around US elections helped to lift sentiment towards the region pushing Latin America to outperform broader EM markets and return to the radar of analysts’ recommendations and foreign investors – Brazil has been experiencing record inflows reverting the trend observed in the past months. The fact Latin American economies and assets has been one of the most severely impacted by the Covid crisis positioned it favorably for a relief rally. The improving outlook for global trade and commodities also bodes well for the region given the relevance of the commodity sectors for most economies. Domestically, we are seeing sequential improvement in economic activity which is translating into corporate earnings while valuations and positioning remain supportive with the region set to benefit from continuity of flows. Key areas to monitor though remain the management of the contagion including the actual implementation of vaccines in the different countries where logistic challenges could lead to delays. The phase-out of stimulus also remains a key topic as most countries in the region are faced with limited room for extension of fiscal measures – in that sense the discussion around the reform agenda in Brazil will be back to the spotlight now that municipal elections are concluded as this agenda remains a requirement to ensure a sustained recovery.