Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Latin American economies welcomed 2024 with new economic vigour. They have shaken off a legacy of economic mismanagement, and now look set to play a new role in the global economy. The region’s economies are broadening out from their traditional commodity base, bringing a dynamism to the region and a breadth of choice for investors.
The whole region benefits from being relatively isolated from global geopolitical conflicts. It is seen as a reliable trading partner for commodities by the US and Europe, but without alienating China. For example, Brazil’s major export partners are China, the US, Argentina, the Netherlands and Spain.1 This diversity not only removes a key source of risk, but is helping to drive foreign direct investment into the region.
Friend-shoring and supply chains
Mexico is a key beneficiary of the ‘friend-shoring’ trend in global supply chains. This is where foreign companies are encouraged by their governments to move manufacturing to more “friendly” nations in response to increasing geopolitical tensions worldwide, but remain unwilling to absorb the additional costs associated with full reshoring to their own country. An example of this is US companies that are looking to set up manufacturing hubs in more “friendly” Mexico, diversifying away from China.
This can be seen in increasing investment into the country. Mexico received $36.1 billion in foreign direct investment in 2023,2 half of which was in manufacturing, led by the auto industry. The US was the principal source of this investment, accounting for more than a third.
Mexico has a relatively strong fiscal balance as well as a strong current account. The latter has benefitted from the recent strength of the US economy both via strong exports to the US as well as strong remittance flows from the US to Mexico.
That said, the Mexican economy will likely be relatively more sensitive to a potential slowdown in economic activity in the United States. The stock market has also performed well recently, which may limit the upside.
Falling interest rates
Across the region, central banks had been proactive in increasing interest rates to help control inflation, which has subsequently fallen significantly. As such, central banks have been in a position to start to lower interest rates, which should support both economic activity and asset prices. This is likely to be a dominant force for much of this year.
Brazil is the poster-child for this shift, with the central bank cutting the policy rate by 0.5% in January for the fifth time in a row.3 With the rate remaining above 11%, it is likely that further reductions will occur, particularly if the US Federal Reserve begins their own cycle of rate cuts. However, we ultimately believe that it is the domestic economic outlook in the Latin American countries that will be the key driver of local asset prices. In the case of Brazil for example, the fund has higher weightings in rate-sensitive domestic stocks as we maintain conviction in our view that rates will come down further, supported by the relatively benign inflation outlook in the country.
We believe the potential for interest rate cuts across the region is creating plentiful of opportunities for investors in Latin American markets. As the breadth of options across the region continues to increase, the dispersion in these markets presents an ideal opportunity for active investors, such as ourselves at the BlackRock Latin American Investment Trust, to capitalize on.
1Santander - Brazil: Foreign Trade in figures - February 2024
2MarketWatch - Mexico received $36.1 billion in foreign direct investment - 15 Feb 2024
3Reuters - Brazil central bank cuts rates by 50bps - 31 January 2024
Risk Warnings
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Investors should refer to the prospectus or offering documentation for the funds full list of risks.
BlackRock Latin American Investment Trust specific risks
Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Currency Risk: The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.
Emerging Markets: Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.
Gearing Risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
