Bogotá — Latin America is looking ahead at 2024 from a sturdier standpoint, with most of the region’s largest economies having managed to rein in inflation, which is paving the way for central banks to ease up monetary policy. However, the investment climate across the region may still be impacted by projections of economic slowdown, while crucial elections in countries including Argentina and Mexico could also trigger investor nerves.
The factors influencing asset prices in Latin America will shift next year as the region grapples with new challenges, including a slowdown in economic growth and the normalization of monetary policy, which could have repercussions in debt instruments that had been appreciating on attractive spreads.
In 2024, Central banks in developed markets will face the dilemma of keeping interest rates high for longer or beginning to cut them, Axel Christensen, Director of Investment Strategy for Latin America at BlackRock, told Bloomberg Línea. They will also closely monitor persistent inflation levels and the impact of more restrictive conditions on corporate earnings.
Emerging market monetary authorities, for their part, are widely regarded as ready to begin a cycle of easing rates.
“Latin America is a region with significant investment potential for the coming year. Beyond political cycles, investors will be looking at the long-term strength of institutions, the stability of regulatory and legal frameworks, and guarantees of physical security,” said Julio César Romero, Chief Economist at Corficolombiana, to Bloomberg Línea.
The economist emphasized that while Latin America is in a phase of economic deceleration, investors will continue to seek “markets where there is confidence” and where they “know that institutions are respected.”
He explained that these factors could influence investment decisions in Latin America going forward, as the region still faces an array of volatility triggers. “Latin America is a region where investors know that there is volatility for several reasons, such as the political and economic cycle, and regulatory uncertainty. This is something that they know they have to deal with in Latin America,” said the analyst from Corficolombiana.
Interest Rate Spread in Latin America
David Cubides, Director of Economic Research at Alianza Valores – Fiduciaria, explained that as inflation and interest rates are expected to fall in most countries in the region, there should be value in the fixed-income market in the medium term. “So, this could be interesting to monitor in the last quarter of this year, when we believe the rate cuts will happen, and of course in 2024,” Cubides said.
“A change in the monetary policy cycle is already being observed, and that can eventually be attractive in the fixed-income market,” he noted.
According to a recent report by Corficolombiana, the region could also face some headwinds in the debt market if the interest rate spread that made the region’s assets attractive compared to other markets is not upheld. That spread compression could also prove a blow to the region’s currencies.
“The process of monetary normalization will further limit prices in the region’s debt markets, despite the interest rate spread compared to advanced economies remaining ample,” the report stated.
Brazil, Mexico, and the Pacific Alliance Stand Out
Blackrock’s Christensen, for his part, highlighted the attractiveness of Brazilian equities in Latin America, considering that valuations stand out compared to other emerging markets. “The inflation outlook in Brazil is promising, as it has reached the lowest levels in three years, allowing the central bank to start the rate-cutting cycle, which will boost economic growth. Additionally, sentiment has become more positive since May, after political uncertainty,” he said.
In the fixed-income investment space, he noted “the attractiveness of Mexican bonds, where a combination of positive growth potential and responsible fiscal policy offers an attractive blend of yields and currency stability.”
According to Sergio Olarte, Chief Economist at Scotiabank Colpatria, “countries with well-established institutions are the ones worth looking at for investment in 2024.” He specifically referred to members of the Pacific Alliance - Mexico, Chile, Colombia, and Peru - as well as other large markets “with many possibilities, such as Brazil.”
For the analyst, depending on the country, it will be very important to determine whether investments will be short or long-term. The aforementioned countries are relatively developed and still offer relatively high interest rates in the short term.
In Central America, Olarte referred to countries like the Dominican Republic, Costa Rica, and Panama, precisely because the first thing investors look at is institutional stability and country risk. “Basically, if you invest in a country, you want to know how easy it will be to withdraw your investment,” he said.
For this region, he believed that “housing or infrastructure could be interesting, especially in the tourism sector” in Central America.
In the Andean markets, “Peru and Colombia also have interesting infrastructure projects, although they are just starting to develop again,” he added.
M&A Activity Provides Clues About Capital Movement
Mergers and acquisitions activity in Latin America reflects which markets are attracting more capital, despite the headwinds they might face. According to figures from TTR Data and Datasite, there were a total of 1,757 M&A-related transactions in Latin America in the year to July, a 20% decrease compared to the same period the previous year.
These transactions had a combined value of $45.308 billion, marking a 34% contraction in terms of value for Latin America. Brazil leads the list of the most active countries in the region for mergers and acquisitions, with 1,075 transactions (a 30% decrease) worth $25.234 billion (a 38% decrease).
Chile followed suit with 223 transactions (a 21% increase) totaling $48.995 billion (a 23% decrease). Mexico remains in the same position in the ranking with 203 transactions (23% fewer) worth $10.639 billion (a 9% decrease).
Colombia recorded 134 transactions (a 29% decrease) worth $2.572 billion in that period, representing a 57% drop.
Argentina’s dynamics lagged behind with 120 transactions (a 2% decrease) estimated at $1.565 billion (a 55% decrease). Peru accounted for 70 operations (a 5% decrease) that totaled approximately $3.857 billion, a significant 84% increase.
Capitalizing on Opportunities in Key LatAm Markets
Marcela Chacón Sierra, Institutional Spokesperson for TTR, explained that “in recent months, the investor market has been surprised by atypical behavior in Latin America, with an increase in funds in key economies such as Mexico, Brazil, Chile, Colombia, and other areas, which are moving against the downward trend internationally.”
“Compared to Europe, these key countries such as Mexico, Brazil, Chile, and Colombia are far from the situation generated by the Russian invasion of Ukraine, both economically and politically, which has greatly benefited the region in the past year,” she said in a conversation with Bloomberg Línea.
According to Chacón Sierra, renewable energies in the short and medium term will serve as a new opportunity to attract foreign investment.
“If we analyze this behavior in 2023, we see that Chile, Colombia, Brazil, and Mexico are economically distant from the powers involved in the energy conflict between Russia and Ukraine. This has served as an opportunity to develop new supply chains on an international level, especially in sectors such as energy, agribusiness, mining, and even manufacturing, as is the case with Mexico and the latest NAFTA agreements and nearshoring,” the analyst explained.
The United States played a leading role in such development, with around 160 investments in the Latin American M&A market during 2023, especially in Mexico, Chile, and Colombia, representing approximately 65% of total U.S. investment in the region.
Meanwhile, Spain and the United Kingdom recorded approximately 33 transactions, especially in Mexico and Colombia.
Regarding local investments, Chile has been the most active country in the region with 29 transactions in Latin America, especially in Colombia, Mexico, and Peru, which account for 95% of these operations. Mexico follows with 14 transactions, especially in Chile, Colombia, and Peru.
In this context, “we must analyze in the short term the effects of the current environment of uncertainty, both internally in terms of politics and on the international stage, which has halted both local and international investments due to inflationary effects, high interest rates, as well as fears of recession in key economies such as the United States and Europe, to see if we will have a stable trend or if we will see a downward trend at the end of 2023 or in early 2024,” she added.
Key Factors in Investment Decision-Making
The analysts consulted by Bloomberg Línea say that a crucial factor investors will consider when injecting money into the region are the competitiveness indicators of each market, which provide a general overview of the business climate.
In this regard, the 2023 World Competitiveness Ranking report, published by the International Institute for Management Development (IMD), summarizes which Latin American markets are leading in competitiveness. To compile this report, 336 competitiveness criteria were considered after reviewing different sources in 64 economies, including economic performance, government and business efficiency, and infrastructure.
According to this report, the top-performing countries in the region are Chile (44th place in the 2023 ranking), followed by Peru (55), Mexico (56), Colombia (58), and Brazil (60). At the bottom are Argentina (63) and Venezuela (64), impacted by hyperinflation and devaluation.
BlackRock believes that in 2024, a significant portion of the investment directed towards Latin America and the Caribbean will continue to focus on opportunities presented by structural megatrends. These include the geopolitical realignment generating interest in Mexico as a beneficiary of nearshoring based on trade agreements and other benefits in its relationship with the U.S.
“In South America, investment will be related to the opportunity created by the energy transition in the demand for critical commodities such as copper and lithium, with Chile and Peru having the largest global reserves,” Axel Christensen pointed out in response to Bloomberg Línea.
In 2024, factors such as the evolution of the global economy, influenced by decisions of central banks in developed countries and the outcome of measures to reinvigorate China’s economy - the main trading partner for many countries in the region - will have a significant impact.
For Christensen, regional trajectories of interest rates decided by central banks and the evolution of political processes, such as the arrival of a new government in Argentina at the end of 2023 and Mexico’s general elections in July 2024, will significantly affect the region.”