Hiba Mouallem:
Hello and welcome to another weekly podcast by BNP Paribas Wealth Management. I am Hiba Mouallem, Investment Strategist, and I'm joined today by our Chief Investment Strategist in Germany, Stephan Kemper, to discuss about the markets in Latin America.
Hello, Stefan.
Stephan Kemper:
Hello Hiba.
Hiba Mouallem:
Stefan, we have lately seen a growing interest from investors in this part of the world. Can you tell us a little bit more about the key factors that dominate the Latin American region and the reasons behind this current interest?
Stephan Kemper:
Absolutely, Latin America is currently enjoying several tailwinds. First and foremost, we have strong global growth, including a growth pickup in the US, which is beneficiary to the region, especially for Mexico. Furthermore, we see a continuing strength in commodity prices. This is also very important for that region, as we have a lot of commodity exposure, commodity-exporting companies over there. Then we have a weaker dollar, which is traditionally also always good for emerging markets, as it cheapens the way they are refinancing themselves. But probably the most important thing is that we really have a wind of change blowing strongly into the state of economic growth, which is from the political angle. Latin America was long known to be a rather socialist continent, but this is about to shift as we see socialist leaders losing elections, so for instance in Argentina or more recently in Chile, and polls for upcoming elections, such as in Peru, are also pointing towards a change towards more market-friendly governance as well.
Hiba Mouallem:
So, there are several points that are behind this current interest. However, political changes are a key theme this year in Latin America. So, can you please elaborate on the subject and the endorsement of the US in the region?
Stephan Kemper:
Absolutely. So, I think this all started with Argentina, which underwent very painful but eventually successful reforms, and they are now seeing their economy growing again. So, in the recent election, the president Milei was supported by the US, and it feels as if the success of Argentina is making more people in Latin America wondering whether socialism is really a winning strategy for the long term.
So, Chile went to the polls at the end of last year and the sitting socialist lost, and a more market-friendly candidate was winning. Peru, as I mentioned before, will vote in April, and we see Rafael Bernardo López leading, who is also a Peruvian businessman and a politician who served as the Mayor of Lima, so also again a more market-friendly candidate being in the lead here.
Then we have Colombia voting at the end of May, and here again we have a pro-business candidate in the lead. And finally, and probably the most important election in Latin America will be in Brazil in October. The current sitting president Lula is still leading, but by a shrinking margin. And the question that I'm asking myself is, will the wind of change from other countries reach Brazil? Because if it will, I think that will be a strong signal to the market that the continent is ready for change. But even if this is not happening in Brazil, the economy is healthy. We have falling interest rates, which is helping consumers and businesses. We have solid banks and strong commodities. So this on its own is already a very solid base for being positive on the region.
Hiba Mouallem:
So after talking about Argentina, Chile, Brazil, and the wind of change that might be coming, I'd like to look at Mexico in more detail. Why is the Mexican economy standing out, and what is the outlook for the coming year?
Stephan Kemper:
We are quite positive on Mexico as well. We just recently upgraded our GDP growth assumptions. Mexico is benefitting from very low tariffs. They are part of the USMCA trade agreement, and therefore they're enjoying one of the lowest tariffs for exports to the US. That makes it a very attractive destination for foreign direct investments, which we already see growing. We have high integration with the US economy, so Mexico is in a way also benefitting from stronger US growth. And we don't think that the renegotiation of the free treaty agreement, which is about to occur this summer, will bring major changes. There will be a lot of volatility. There will be a lot of political noise, and I'm quite sure that Donald Trump is about to make a lot of noise about it. But eventually, I don't think that there will be a major change for the tariff rate because this would be a danger towards rising inflation, lower affordability. And that's a key fact that is dominating the US political landscape as we move into the midterm elections over there. So therefore, his hand is to a certain degree tied, and also his voter base is broadly in favor of this trade agreement. Therefore, I think that Mexico will remain a major gate to the US market, and the stock market still screens rather cheap, especially if we compare it against other emerging market assets.
Hiba Mouallem:
So finally, Stephan, maybe you could give us a final word on the Latin American region as a whole and the outlook for the region.
Stephan Kemper:
Absolutely. So I think we already discussed plenty of reasons to be positive on Latin America, be it a weaker dollar, stronger economic growth, so on and so forth. But there's another benefit of owning Latin America within your emerging market allocation, and that is diversification. While Asian emerging market countries are much more exposed to tech, be it semis or AI in general, Latin America is much more geared towards cyclical exposure, such as banks and commodities. And therefore, I think it helps reducing, taking too much thematic risk within your portfolio. So I think this is another angle which is worth considering when thinking about Latin America, besides all the other things that we discussed.
Hiba Mouallem:
Thank you very much, Stephan, for all this information about the LatAm region. And I want to thank our audience out there for listening to this podcast. Please don't hesitate to like, share, and subscribe to our series of podcasts. Until next time, goodbye.
Stephan Kemper:
Goodbye.