Latin America
Brazilian policymakers are stuck between a rock and a hard place. There is no combination of fiscal and monetary policies that can assure decent growth, on-target inflation, a stable exchange rate, and public debt sustainability. We recommend investors maintain an underweight allocation to Brazilian fixed-income markets versus their EM peers and continue shorting BRL versus MXN. We have been bearish on the Bovespa in absolute terms and are now downgrading Brazilian stocks from neutral to underweight within an EM equity portfolio.
Colombian financial markets have rallied on the expectation that a right-wing government will be elected in 2026. We take a contrarian bearish stance on the nation's financial markets. Colombia is suffering from two structural macro issues – unsustainable public debt and plunging energy exports – that will not be easily solved by a conservative administration in 2026. Continue underweighting Colombia within EM equity and fixed-income portfolios, continue shorting the COP versus the USD and the CLP, and bet on yield curve steepening.
Argentina is entering a regime shift from the traditional short boom-bust cycles of the past 50 years. Profound structural reforms will result in a productivity boom, leading to a more durable economic expansion while keeping with the disinflation trend. Authorities will likely lift capital and currency controls in the second quarter of this year. All in all, odds are that Argentinian assets have entered a multi-year bull market.
Any additional fiscal tightening and further rate hikes might serve as a band-aid, but not a cure, to Brazilian markets. The country’s risk assets and the currency will continue to face headwinds from an impending recession, a strengthening USD, weak commodity prices, and worsening public debt dynamics. Investors should fade out any relief rallies in Brazilian markets for now.
In absolute terms, Chilean markets and the currency will fall given a strengthening trend in the US dollar and weak global trade. However, Chile’s economy can withstand the global trade slump relatively well due to substantial monetary easing at home, which will help Chilean markets outperform EM peers. Moreover, a favorable and improving political backdrop and attractive valuations will benefit Chilean equities and the peso versus their EM counterparts.
The politically induced selloff in Mexican markets has gone too far. In our view, investor fears about the constitutional changes are largely unwarranted. These reforms will have little to no ramifications for the economy in the foreseeable future, and it is not clear to what extent they can undermine Mexican democracy. Moreover, the market riot is not justified by the country’s decent macro shape. All in all, Mexican markets will resume their outperformance versus their EM peers sooner rather than later.