Welcome to Thoughts on the Market.
I'm Nikolai Lippmann, Morgenstern's Chief Latin American Equity Strategist.
If you ever felt like Latin America is too complicated to follow, today's episode is for you.
It's Monday, February 9th at 10 a.m. in New York.
The big idea in our research is simple.
Latin America is facing a trifecta of change that could set up a very different investment story from what investors have gotten used to.
We could be moving towards an investment or capex cycle in the shadow of the global AI capex cycle.
And this is a stark departure from prior consumer cycles in Latin America.
Latin America's GDP today is about $6 trillion.
Yet Latin American equities account for just about 80 basis points of the main global index, MSCI.
All Country World Equity Benchmark.
In plain English
It's really easy for investors to overlook such a vast region, but the narrative seems to be changing, thanks to three key factors.
Number one, shifting geopolitics in this increasingly global multipolar world.
We can see this with trade rules, security priorities, supply chains that are getting rewritten.
Capital and investment will often move alongside with these changing rules.
Clearly, as we can all see, US priorities in Latin America have shifted and with them have local priorities and incentives.
Second, interest rates may very well have been peaking and could decline into 26%.
When borrowing costs fall, it just becomes easier to fund factories infrastructure, AI and expansion into all kinds of different investment which become more feasible.
What is more, we see a big shift in the size and growth of domestic capital markets in almost every country in Latin America, something that happens courtesy of reform and is certainly new versus prior cycles.
And finally, elections that could lead to an important policy shift across Latin America.
We see signs of moving towards greater fiscal responsibility in many sides of the region, with upcoming elections in Colombia and Brazil.
We have already seen new policymakers in Argentina, Chile, Mexico depart from prior populism.
So when we put all this together geopolitics, rates and local election you get to the core of our thesis a possible LATAM spring, meaning a decisive break from the status quo towards fiscal consolidation, monetary easing and structural reform.
And we think that that could be a potential move that restores some confidence and attracts private capital.
In our spring scenario, we see interest rates coming down, not rising in a scenario of higher growth, to 6 in Brazil and Mexico, 7 in Argentina and just 4 in Chile.
This helped the re-rating of the region.
There's another powerful factor. that I think many investors overlook.
And that is a key difference versus prior cycles, as already mentioned.
And that's the domestic savings.
Local portfolios today are much bigger, much deeper capital markets and they're heavily skewed towards fixed income.
75% of Latin American portfolios are in fixed income versus 25% in equity.
In Brazil, the number is even higher with 90% to 95% in fixed income.
If this shifts even pathway towards equity, it can deepen and support local capital markets.
It supports valuation.
For the region as a whole.
Sectors most impacted by this transformation would be financial services, energy utilities, IT and health care.
Up until now, I think Latin America has been viewed as a region where a lot could go wrong.
We asked the reverse question.
What could go right?
If the trifecta lines up geopolitics, peaking rates and elections that enable a more investment-friendly policy, a capex cycle Latin America could shift from being seen mainly as a supplier of commodities and labor to a far more investment-driven engine of growth.
That's why investors should put Latin America on the radar now and not wait until spring is already in full bloom.
Thanks for listening.
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