Latin American stocks had a tough year in 2024. Higher bond yields in the US, as markets anticipated a slower pace of Federal Reserve rate cuts, have weighed on the region’s central banks and kept interest rates higher than expected. There have also been some concerns about potential tariffs under the new US administration and the direction of policymaking in Mexico and Brazil.
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.
The economic climate in Brazil
However, following this weakness, we entered 2025 with stock markets trading at attractive levels. In Brazil, for example, many stocks trade on single-digit multiples while paying double-digit dividend yields. The Brazilian real also saw a significant decline in 2024, making Brazilian exports much more competitive.
There are still risks in Brazil. The government’s approach to fiscal policy has seen it lose credibility, with local and foreign investors requiring a higher return to lend to it. While it is possible to argue that the fiscal deficit in 2024 was better than expected, this outcome was largely driven by significant pressure from financial markets and includes numerous one-off revenues. Nevertheless, these risks are, in our view, largely priced into markets.
In the longer-term, we believe elevated rates in Brazil will lead to a decline in economic activity, less pressure on inflation and thus lower interest rates down the line. Lower interest rates in the US may also give the Brazilian central bank more flexibility. At the same time, the currency is supported by competitive exports and lower economic activity will keep a lid on imports. Any improvement on the fiscal side and/or lower interest rates could be the catalyst for a recovery in the stock market.
That said, while we are largely in line with the benchmark weighting in Brazil on the BlackRock Latin American Investment Trust, we remain cautious in our positioning. We have reduced our exposure to more indebted companies and shifted our focus to companies with stronger balance sheets, which we believe will fare better in the year ahead.
Mexico also struggled in 2024. The main source of weakness has been the new government’s announcement of a highly controversial judicial reform that raises question marks about future judicial independence and the rule of law. Trump's election victory and his vocal criticism of Mexico exacerbated the challenges later in the year. However, similar to Brazil, we believe that much of this is already reflected in the pricing of Mexican stock markets.
The economic outlook for Mexico and the rest of Latin America
As with Brazil, Mexican interest rates have remained higher than expected, with the benchmark rate still at 10% at the end of the year, even though inflation has dropped to around 4%. This should give the central bank scope for rate cuts in the year ahead. Donald Trump’s proposed tariff regime remains unclear, and could be a problem for key industries such as auto-manufacturing. However, the longer-term trend of near-shoring supply chains is likely to continue and should boost the Mexican economy. Mexico remains the biggest overweight in the fund.
In Argentina, we are pleased to see that the country is back on a path towards economic orthodoxy, which we believe will significantly benefit society in the medium term. Nevertheless, the process of adjusting the Argentine economy is not easy and we believe the situation is still delicate. We do not have a significant position in the country.
The trust is also underweight the rest of Latin America. For many countries in the region, their economic cycles are at a later stage, with the interest rate cutting cycle already underway. We prefer to capture trends at an earlier point. In our view, Mexico is on the cusp of rate cuts and Brazil is so cheap that any minor improvement could result in a market rally and this is where we prefer to direct investment.
The whole region is benefitting from being relatively isolated from global geopolitical conflicts. It has sufficient geopolitical flexibility to trade with both sides. We believe that this will lead to both an increase in foreign direct investment and an increase in allocation from investors across the region. There are risks to investing in Latin America, but they are reflected in valuations, with lowly priced stocks and high dividend yields, and it is a region that has historically rewarded patience.
For more information on how to access the opportunities presented in Latin America, please visit www.blackrock.com/uk/brla
Risk Warnings
Investors should refer to the prospectus or offering documentation for the funds full list of risks.
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.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time and depend on personal individual circumstances.
Fund-specific risks
BlackRock Latin American Investment Trust plc
Counterparty Risk, Currency Risk, Emerging Markets, Gearing Risk
Description of Fund 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.
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