Macro Research

Latin America equities have fallen by close to -50% this year. Are they worth the bargain now?

Latin America has been one of the biggest losers this year so far, as the region struggles helplessly with the Covid-19 crisis. Brazil, the largest economy within the region, has been on the headlines recently for the wrong reasons – President Bolsonaro stubbornly refuses to exercise proper quarantine measures. In this article, we take a closer look at the region, to determine if they are worth the bargain.

iFAST Macro Research Team
|
Published on 09 May 2020

Latin America equities have fallen by close to -50% this year. Are they worth the bargain now? | Open a FREE FSM account and manage all your investments conveniently in ONE place

Photo by Raphael on Unsplash

The Latin America (Latam) region has been struggling to contain the Covid-19 outbreak, even with lockdown measures. Political figures in Latam downplaying the outbreak initially resulting in delayed and tepid initial response.

Poor governance, social unrest, crowded housing and poor healthcare have negated the effectiveness of lockdown measures. As a result, Latam is increasingly looking like the new epicentre for Covid-19 pandemic.

To make matter worse, the region is also hit with a double whammy of falling commodities, oil prices and export volume, amid the global lockdown. Commodities' outsized contribution to GDP growth, labour market and fiscal revenue means that these areas are the first to be hit.

The weak commodity prices and political uncertainties have sparked a massive capital flight in Latam. This resulted in huge depreciation in currency and the equity market selloff as capital rushes out.

Latest economic data has confirmed that Latam has slumped into a deep recession. Earnings growth is similarly expected to deteriorate by more than 30% this year. Latam equities are now trading at an elevated valuation due to the erosion in earnings growth.

Looking past this year, however, valuation of Latam equities looks more appealing - an upside potential of more than 40% by end-2022. Tactically, we believe that there is still a case to be made for some exposure to Latam equities in investors’ portfolios for the long-term.

What is the Latam region?

Latin America (Latam), as gauged by the MSCI Emerging Markets Latin America Index, comprises of North America (which includes Central America and the Caribbean) and South America. Most economies in the region fall under the emerging market (EM) space.

With 112 constituents, the MSCI Emerging Markets Latin America Index consists of 6 Emerging Markets in Latam. Brazil makes up the majority of the index, with Mexico also having a significant representation.

Chart 1: Latam composition by country weights

Latam: The new Covid-19 epicentre in the world?

While the rest of the world is preparing to ease lockdown measures, Latam is still struggling to combat the outbreak even with lockdown measures in place. In the initial period, political figures across the region were seen downplaying the outbreak thus resulting in delayed and tepid initial response. To complicate matter, there was also a severe lack of testing.

While lockdown measures have managed to dampen the curve, the number of new daily cases remains staggering in many Latam economies. Poor governance, high social unrest, crowded housing facilities and poor healthcare infrastructure have negated the effectiveness of lockdown measures. We expect Latam to spend an extended period.

Table 1: Covid developments in the Latam region and Covid cases

Latam Economies	Covid-related highlights
Brazil	· Number of cases has recently overtaken China(108,266 cases as of 5 May). · Country with the second highest infection rate. · Only 0.16% of its population has been tested. Hence, actual numbers of infected may be much higher. · States began to tighten lockdown measures in late March. · Brazilian president publicly supported protests against lockdown and advised citizens to ignore it. · Crowded housing and limited access to clean water made social distancing impossible.
Mexico	· Mexico has 23,471 cases a(s of 5 May), but high rate of infection is not slowing down. · 0.078% of its population has been tested for Covid-19, a low degree of testing. · Continued to host mass events in March. Only in late March did Mexico close borders and non-essential businesses. · The lack of information to public, poor healthcare infrastructure and high social unrest.
Peru, Chile, Colombia and others	· Other Latam countries also reporting significant numbers of infections, especially Peru (47,372 cases as of 5 May) and Chile (20,643 cases as of 5 May). · Number of cases in Latam showed no sign of peaking. · Political tensions and social unrest in these countries led to clustering of large crowds which may have exacerbated the spread.

Chart 1: Confirmed Covid-19 cases are on an exponential growth trend in the Latam - and that is with inadequate testing

Plunging commodity prices and export volume a nightmare for Latam

Unlike the EMEA region, the Latam region is economically reliant across diverse commodities such as industrial metals, crude oil and agricultural products. Its outsized contribution to the region’s GDP growth (chart 2), labour market and fiscal revenue means that these areas are the first to be hit. Commodities exporters like Latam have been hit with a double whammy as both prices and export volume collapsed after the Covid outbreak.

Commodity prices has been decimated by the treacherous impact of Covid-19 (chart 2). Strong global growth prospects and weak US dollar are key catalysts for rising commodity prices. However, in today’s environment, the opposite narrative is materializing, with the addition of intense demand destruction induced by the pandemic. Disruption in the supply chain due to lockdown measures compounded to the issue, where commodities exports also fell drastically.

While the re-opening of global economies may see a return in commodity demand, it will take time for demand to reflate back to pre-Covid levels. Above all, with many parts of the world dipping in to recession, global demand for commodity should remain feeble for most part of this year and may only ascend nearing the end of 2020. We anticipate an improvement in commodity prices as economies re-open but aggregate price levels should remain muted this year.

Chart 2: Plunging commodity prices will drag Latam’s growth down in 2020

Chart 3: All categories of commodity saw prices nosedived in 2020

Strong dollar, plunging commodity prices and Covid panic a perfect setup for capital flight

Risk sentiments is a double edge sword for EMs as a risk-on bout triggers massive inflow, while a risk-off appetite engenders massive capital flight. We think no other region exhibit this trait more aggressively than Latam, which is extremely vulnerable to fluctuation in risk sentiments.

We believe there are four factors potentially driving capital flight - a strong dollar (chart4), weak commodity prices, political uncertainties and constant twin deficits (chart 5). The former two are powerful macro drivers whereas we consider the latter a structural one. These factors may happen in tandem as seen in 2008 or 2016, resulting in string waves of capital flight.

Back in 2018, Argentina triggered a EM-wide risk-off in sentiments but Latam managed to recover relatively unscathed (the four factors were not strongly present). However, luck was not in the favour for the region this time around. The Covid outbreak (a predominant factor) and a combination of the four aforementioned factors made the perfect setup for a powerful capital flight in Latam. Consequently, this triggered huge currency depreciation (feedback loop) and equity market selloff (chart 6).

Our team believes that capital flight in Latam will persist in the near-term as the Covid situation in the region worsens. Conversely, the intensity should soften when some of the four factors ease, (likely to be commodity prices and the gradual dissipation of political uncertainties). Until then, we believe Latam will remain caught in the strangle hold by powerful capital flight.

Chart 4: Latam currency depreciation a result of risk-off sentiments triggered by a strong dollar

Chart 5: Latam economies have some of the worst ‘balance sheets’ amongst EMs

Chart 6: Latam risk-off often result in outflow in equity investment as seen in Brazil

Devastation in Latam Currencies

Latam currencies were caught in a storm, courtesy of the Covid crisis, as most nosedived dramatically against the greenback. The region saw the worst plunge in currency value in the year-to-date (chart 7). The Brazilian Real being in the eye of a storm fell -29.5% with the Mexican peso following closely with a -22.4% fall (against the dollar) as of 7 May.

As discussed above, the mass capital flight (selling of Latam currencies) underpinned by factors discussed above – worsening Covid situation, weak commodity prices, rising political risk and mounting deficits - drove such outrageous magnitude of depreciation, which was worsen by a strengthening dollar.

Latam currencies may remain under negative pressure as capital flight persists. In the near term, that is amplified by potential rate cuts as interest rates differential falls. In the long term, negative pressure will come from larger deficits, likely occurring after heavy stimulus. Upon a closer look at international reserves for Latam economies, we note that countries like Brazil may have difficulty defending the currency for longer period of time (chart 8).

Currency weakness in Latam has deep knock-on effects via (i) limiting room for rate cuts, (ii) drawing down of reserves and (iii) increasing the debt servicing cost. Such implications have already materialised in Latam economies and may morph into greater headwinds if prolong.

Chart 7: Latam saw the worst depreciation against the dollar amongst EMs

Chart 8: Brazil has burned through reserves defending a plunging currency

The rising debt mountain and dollar exposure

Back during 2008’s GFC, debt within the region was mostly local currency and there had been a build-up international reserves as commodity prices soared. Fast forward more than 10 years, both local currency and dollar-denominated debt (particularly Mexico) had piled up furiously while international reserves has not grown much. The changed in debt landscape made Latam vulnerable to external shocks, which was triggered by Covid-19 this year.

The recent massive depreciation in Latam currencies made servicing debt painful as it cost more to do so. Mexico and Brazil were significantly exposed to rising dollar strength (chart 9). To make matters worst, the issuance of dollar-debt picked up lately as policy makers fund for more stimulus package. The same was observed for corporates in Latam as well.

As such, not only will the Latam economies and corporates emerge from the Covid-19 crisis with more debt but servicing them will be costlier. For corporates, mounting debt and/or costlier debt will incur negative implications as it reduces CAPEX, dividend payouts and profit as cashflow is diverted to tackle mounting debt load.

For economies, mounting debt raises the credit risks of Latam economies (prominently Brazil and Mexico) and this is captured by the 5-year credit default swap (chart 10) of the respective economies. Reinforcing this point were the recent waves of downgrades for the outlook of Latam economies by credit rating agencies (table 2). Mounting credit risks has negative economic growth implications, feedback into capital flight and results in costlier debt financing.

Chart 9: Mexico and Brazil highly exposed to dollar appreciation

Chart 10: Spike in CDS indicates rising risk in issuer default

Table 2: Wave of downgrade hit many Latam countries recently

Latam Countries	Agency	Rating for Outlook	Effective as of
Brazil	S&P’s	Stable	04/06/2020
	Moody’s	Stable	04/09/2018
	Fitch	Negative	05/06/2020
Mexico	S&P’s	Negative	03/26/2020
	Moody’s	Negative	04/17/2020
	Fitch	Stable	04/15/2020
Chile	S&P’s	Negative	04/27/2020
	Moody’s	Stable	07/26/2018
	Fitch	Negative	03/12/2020
Peru	S&P’s	Stable	08/19/2013
	Moody’s	Stable	07/02/2014
	Fitch	Stable	10/23/2013
Colombia	S&P’s	Negative	03/26/2020
	Moody’s	Stable	05/23/2019
	Fitch	Negative	04/01/2020
Source: S&P, Moody’s, Fitch, iFAST compilations. Data as of May 2020.

Incoming deep recession but limited stimulus toolkit

Plunging commodity prices do not bode well for Latam’s economic growth, let alone a collapsed in private consumption and trade-related sectors which are paramount the region’s economies. Economic data for the region, shown in the charts below, have come in poorer than 2015 and 2008, periods when Latam fell into deep recessions.

Commodity prices were also far below levels seen in those two periods. The magnitude of economic data (chart 11 and 12) are implying a deep recession in Latam and further incoming data should confirm that.

It is also worth remembering that before the Covid-19 crisis, Mexico and Brazil were plagued with idiosyncratic growth headwind. These two biggest economies in the Latam region were already facing poor growth prospects, in part due to the uncertainties surrounding the US-China trade tensions.

Handicapped by bulging fiscal deficit (chart 5), many Latam economies will have limited headspace for fiscal stimulus to support growth. Thus, policymakers in Latam might not be able to run massive stimulus seen in developed markets.

Not only have falling commodity prices and volume curtailed fiscal revenue (i.e. crude oil accounts for around a third of Mexico’s fiscal revenue), Latam policymakers are facing a conundrum. They need to show investors their commitment to fiscal discipline during this crisis (hence not able to run deep deficits), otherwise they might face issues financing their debt.

Latam economies thus have to rely more on monetary stimulus, which will have a trade-off as cutting rates further may risk deeper depreciation as seen in Brazil. With a limited toolkit for stimulus, a looming deep recession and new headwinds (discussed in above sections), the growth outlook for Latam in 2020 remains murky and a protracted recovery well into 2021 is likely.

Chart 11: Early data supports incoming deep recession for Latam

Chart 12: Worst print and fastest deceleration observed for multiple economic data

Earnings: Poor earnings growth outlook due to subdued commodities demand

As a net exporter of oil, commodities and agricultural products, the near-term earnings outlook Latam region remains weak due to the subdued global demand as a result of Covid-19 lockdown measures. In addition, with Latam economies already in deep recession, the knock-on effect on corporate earnings are poised to be disastrous.

Oil, in particular, is slated to see a persistent weakness in prices this year, due to the unfavourable combination of a steep deterioration in demand and abundant supply from the various oil-producing regions. The broad basket of commodities – which include industrial metals like aluminium and copper – have waned as global manufacturing activities have been brought to a standstill.

Historically, growth in corporate earnings in the Latam region move in tandem with global commodities prices, despite small direct exposure to commodities-related sectors in the Latam Index. We believe that while direct exposure is minor, the region remains heavily reliant on commodities exports, and the ripple effect of a downturn has indirectly dragged on overall earnings growth of Latam companies (Chart 13).

With the broad commodity index facing a year-to-date decline of more than 30% this year, earnings growth is similarly expected to deteriorate by similar magnitude. In-line with current consensus estimates, we project this year FY2020 earnings to contract at rate of -34% compared to one year ago.

Chart 13: Corporate earnings in Latam region (MXLA Index) grow in tandem to commodities prices.

Looking further ahead, the medium-term outlook for Latam equities is equally challenging. We remain cautious on the collateral damage that Covid-19 can have on the Latam economies. Their weak healthcare infrastructure, and the need for stimulus to boost their economies will lead to a more severe deterioration in fiscal imbalances and possibly higher default rates.

As we noted in the sections above, we see high likelihood of muted foreign direct investments (due to capital flight) and hence capital expenditure growth in the near-term. The absence of such factors necessary for Latam economies and companies to generate longer-term earnings growth jeopardises the future growth potential of Latam corporates.

However, beyond this year, we remain optimistic that the drag to earnings due to global Covid-19 pandemic and ensuing recession in 1H20 would have dissipated, paving the way for a robust cyclical recovery in the global economy.

Coupled with the low base effect of this year, we expect Latam earnings to rebound by range of 30-40% and 20% in FY2021 and FY2022 respectively. Such robust earnings growth is typical of the region, as well as broad EM equities post global economic recessions.

Valuation: Despite pullback in prices, Latam equities are no longer value picks in the near-term

As earnings growth deteriorates rapidly this year, the sharp pullback of Latam equities prices did not result in cheaper valuations. On the contrary, Latam equities are now trading at an elevated price-to-earnings (PE) valuation multiple, one standard deviation above its ten-year average.

Latam equities are trading at PE of 14.9X its FY2020 earnings per share (EPS), which is also above our fair PE ratio of 13.0X allotted to the Latam region (Chart 14).

Latam equities are typically positioned as risk assets – alongside other EM equities (EM Asia and EM Europe, Middle East and Africa region) – in global investors’ portfolios. Investors typically shun such risk assets amid volatile market conditions.

Into the second part of this year, we believe the market volatilities will persist in the heightened state, with the US preparing for its presidential election. With President Trump seeking re-election and his penchant for China trade tariffs, we remain cautious of a resurgence of the US-China trade skimish yet this year. As we have witnessed last year, such confrontations are detrimental for risk sentiment and thus valuation of Latam and EM equities as a whole.

Chart 14: Valuations of Latam equities are no longer cheap as earnings growth deteriorates rapidly due to Covid-19 pandemics.

Case for tactical positioning in Latam equities for global cyclical recovery post Covid-19

Looking past this year, valuation of Latam equities looks more appealing. Despite our cautious near-term outlook, we still see appeal in a tactical positioning in Latam equities as a cyclical beta play.

Like most EMs, Latam equities offer a direct exposure to the cyclical recovery of global economy, which we believe can materialise as soon as end of this year. EM equities have historically outperformed global equities at the start of global economic cycle, as demand for raw material input and commodities surges with the gradual ramping of manufacturing activities around the world.

Applying our fair PE ratio of 13.0X on our estimated FY2022 earnings for Latam equities, we derived an upside potential of more than 40% from today’s price (Table 3).

Given such substantial upside potential, we believe that there is a case to be made for some exposure to Latam equities in investors’ portfolios for the long-term. Investors who are willing to ride through the near-term volatilities and exercise patience with their Latam investment may be well-rewarded with sizable gains in the next 2-3 years (Chart 15).

Table 3: Near-term pain, but Latam equities remain appealing long-term investments

Latin America Equities (MXLA Index)	FY2019	FY2020	FY2021	FY2022
PE Ratio (X)	9.9	14.9	11.0	9.2
Earnings Growth %YoY	-18.1%	-33.9%	35.0%	20.0%
Earnings Per Share	158.5	104.8	141.4	169.7
Projected Fair Price (Based on 13.0X Fair PE Ratio)	2,061.0	1,362.0	1,838.7	2,206.5
Potential Upside from Today (%)				41%
Source: Bloomberg Finance L.P., iFAST estimates. Data as of May 2020.

Chart 15: Latam equities offer a direct exposure to the cyclical recovery of global economy in the next two years.

Overall: Risk-reward for Latam equities skewed to the downside in the near-term. But long term remains promising.

The Covid crisis inevitably amplified many of Latam’s risks that have layed dormant since the GFC. It also exposed the vulnerabilities of the region to external shocks and the idiosyncratic risks highlighted in this article.

In the near term, Latam suffers from powerful capital flight (currency and equity market implications), a deep recession, limited stimulus toolkit and worsening Covid situation. In the longer term, the rising debt load and dollar-debt exposure may eventually weigh on Latam’s gowth.

Nonetheless, we have not turned all negative on the region. When global economic growth and inflation picks back up eventually, Latam could be one of the first region to benefit given its exposure to commodity and risk sentiments.

With risk-reward prospects skewed to the downside amid this Covid crisis, we opted to stay cautious on this region at the current juncture. That said however, we see appeal in a tactical positioning in Latam equities in investors’ portfolios, for the eventual cyclical recovery of the global economy.

Furthermore, we remain on the lookout for positive signs of an economic turnaround in the Latam region and will not hesitate to revise our views on this region once favorable catalysts materialise within the Latam economies.

Prefer Asia EMs within the EM investible universe

At the current juncture, investors seeking exposure to EMs (for diversification and/or tactical purpose) can instead consider Asia EMs (China, Taiwan, Asia ex-Japan), which possess a rosier outlook. Thus, it could be well worth exploring these investment options.

The following are the list of suggested products (unit trust & ETF) to gain exposure to the above alternatives. Included are also the recommended fund/ ETF picks for the Latam region for investors considering a product switch.

Region/ Market	Funds	ETFs
Latam	PineBridge Latin America Equity A USD	iShares Latin America 40 ETF (NYSE.ILF)
Asian EMs	Schroder Asian Growth Dis SGD	iShares Core MSCI AC Asia ex Japan Index ETF

The Research Team is part of iFAST Financial Pte Ltd.

All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.

Please read our full disclaimers on the website at ( https://fsm.global/sg/policies/328125/investment-account-terms-&-conditions).

iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.

Ways to Invest with FSM Global

Why FSM Global

Don't have an account with us?

Open an account here

Need Financial Advice?

Make an appointment

Latest Articles More

Markets are celebrating a Hormuz deal. History says not to.
views: 589 uploaded.on: 06 Aug 2026
US 2Q26 earnings review: Strong earnings beats, but valuations keep us underweight
views: 321 uploaded.on: 06 Aug 2026
Market Access Restrictions: Investment Implications for China's AI Hardware
views: 359 uploaded.on: 06 Aug 2026
China's Politburo holds back on stimulus, but we stay positive on China tech
views: 448 uploaded.on: 04 Aug 2026
Cloud Computing Update: Increasingly diverging
views: 369 uploaded.on: 04 Aug 2026

more.articles More