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Massive asset managers are flocking to Latin American bonds and currencies, attracted by the area’s excessive rates of interest, low inflation and extra resilient economies than many had anticipated.
Latin America is dwelling to 5 of the world’s high eight performing currencies this yr, which have benefited from the area’s central banks appearing early and decisively by elevating charges and maintaining them excessive at the same time as inflation recedes. Complete returns of native bonds have additionally surged forward of their developed market friends, as chunky inflation-adjusted yields draw the eye of buyers.
“With each month that passes the actual yield is getting larger and greater,” stated Paul Greer, rising markets debt and FX portfolio supervisor at Constancy. “So increasingly more buyers need to put their cash into Latin American currencies for that purpose.”
Greer, whose portfolio is obese in native forex bonds in Brazil, Mexico, Colombia, Peru and Uruguay, stated that for each authorities debt and pure forex publicity, Latin America is “the place to be”. An exception, he stated, was Argentina, which has been reduce off from entry to worldwide markets after a debt default and the place inflation runs at greater than 100 per cent.
Latin American central banks took the quickest and most decisive motion globally when inflationary pressures picked up within the wake of the coronavirus pandemic, which helped suppress worth progress rather more shortly than in different areas.
However excessive charges haven’t choked off financial progress. Brazil and Mexico — the area’s two largest economies by GDP and the most well-liked amongst worldwide buyers — each outperformed progress forecasts within the first quarter of this yr, prompting economists to boost their projections for the top of the yr.
In Brazil, the poster youngster for early and aggressive rises, annual inflation is now underneath 4 per cent, down from greater than 13 per cent this time final yr, whereas rates of interest have been stored excessive at 13.75 per cent since August 2022. In Mexico, charges have been held at 11.25 per cent since March with headline inflation falling to six per cent in Could.
“In locations like Brazil or Mexico, now you’re speaking 6 per cent and 4 per cent actual yields, based mostly on the place inflation expectations are, which is a extremely compelling argument to be including to these currencies,” stated Iain Stealey, chief funding officer of world fastened revenue at JPMorgan Asset Administration.
“Is it a crowded commerce? Has everybody piled into it? I don’t suppose that’s the case but,” Stealey stated, including international possession of native rising market bonds continues to be low following the pandemic and multi-asset buyers “haven’t but moved into rising market debt”.
A part of the explanation investors are being drawn again to Latin America is that market nerves over leftwing governments in Brazil, Chile, Colombia and Peru have been calmed by a scarcity of congressional majorities which have left them unable to implement lots of their insurance policies.
And central banks have maintained their independence, ignoring calls from President Luiz Inácio Lula da Silva in Brazil and President Andrés Manuel López Obrador in Mexico to chop rates of interest, arguing that it stifles financial progress.
“Regardless of all of the bluster from the politicians, it has not impacted central financial institution choices,” stated Geoffrey Yu, senior international trade strategist at BNY Mellon.
Yu stated another excuse for the success of Latin American currencies and bonds in 2023 was years of international buyers avoiding the area. “There’s been virtually no positioning — so it’s a simple commerce. It’s a very good time to purchase bonds earlier than central banks begin slicing charges.”
The fear for forex buyers now could be that the rally will run out of steam as central banks begin slicing charges forward of different areas. Chile is poised to start out decreasing this month, buyers say, adopted by Peru and Brazil in August and Colombia and Mexico by the top of the yr.
Daniel Ivascyn, chief funding officer at Pimco, stated: “At these ranges we now have rather less conviction on the [Mexican] peso, which has had a mixture of very sturdy efficiency and comparatively low volatility.”
However he stated bonds in Mexico and Brazil “are beginning to look attention-grabbing” as inflation pulls again and the prospect of fee cuts attracts nearer. “They perceive the price of being late on inflation. No less than the chance for extra sustained efficiency is there,” he stated.
Whereas some buyers say the Mexican peso is beginning to look overvalued, if central banks reduce charges slowly, currencies throughout the area may proceed to carry out nicely. Greer stated he’s nonetheless betting within the main South American currencies as a result of “inflation will proceed to fall sooner than central banks will dare to chop rates of interest”.
Mexico particularly has some enticing long-term structural benefits, as key beneficiary of “friendshoring” of US firms out of China to lower-cost, nearer labour markets, and a surge in remittances boosted by a good US labour market. It additionally has among the many most secure funds within the area, boosted by fiscal restraint in response to the pandemic, however is among the most delicate rising markets to any slowing within the US financial system.
Regardless of the dangers, Jim Cielinski, world head of fastened revenue at Janus Henderson, stated rising and growing markets generally “look a lot better positioned in mixture than their developed market friends”.
“We might anticipate the Mexican peso and Brazilian actual to be increased by the top of the yr,” he stated.