Latin America underperformed developed markets throughout 2002 until October, when the uncertainty surrounding the Brazilian presidential elections dissipated. From that point onward, markets in the region began to outperform. Peru and Colombia, in particular, benefited from higher commodity prices and an improved political environment. Argentina's collapse made valuations more attractive, which has recently led to a recovery. The risk premium has priced in a "hard landing" for global economic growth, although this remains unlikely. The international landscape is currently boosting growth and improving the risk environment in Latin America.
However, risks associated with investing in this region remain, such as a potential downturn in the US economy that could lead to a slowdown in global economic growth. It also remains to be seen whether the new Brazilian administration will achieve its economic objectives. As a result of geopolitical tensions, risk aversion could increase.
In this context, regarding portfolio composition, we aim to invest in high-quality growth stocks and focus on companies with strong earnings and the ability to generate free cash flow. With respect to country allocation, we continue to favor Mexico and intend to increase our exposure to Brazil relative to the benchmark, thereby increasing the beta coefficient. In terms of sector allocation, we maintain an underweight position in the public and financial sectors and an overweight position in the energy and industrial sectors.
Current balance adjustment by current account
Weaker global growth and increased risk aversion led to a decrease in external financing. As a result, Latin American economic growth contracted, which in turn resulted in a narrowing of the current account deficit.
The negative reaction to economic liberalization has been limited to Venezuela. Meanwhile, in Brazil, the newly elected president, Lula, has outlined his government's policies, which will focus on social security reform, controlling inflation to allow for interest rate cuts, stimulating growth, and stabilizing the debt-to-GDP ratio. Thanks to these measures, the region is poised for economic recovery.
Mexico: High correlation with the US economy
Mexican growth remains heavily dependent on the U.S. economy, particularly in terms of exports and industry, and therefore should benefit significantly if the neighboring country's economy grows as projected. Domestic credit is recovering after years of contraction, and fiscal accounts have received a temporary boost due to rising oil prices. On the other hand, public spending will not be flexible.
The sharp currency depreciation, while perhaps exaggerated in the short term, will alleviate concerns about competitiveness. Nevertheless, reforms are key to boosting productivity and stimulating domestic growth.
We do not expect any progress on energy reform before the congressional elections on July 6, and the outcome of these elections will determine the prospects for Fox's presidency. Currently, Mexico presents itself as a cheap investment. The key to this market is the adoption of a particular "bottom-up" analysis, since many companies have strong balance sheets and are generating free cash flow.
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