March 30, 2018 marked the end of the first quarter of 2018, and so far, the regional indices for Latin America have shown strong performance. The S&P Latin America BMI, which is designed to measure the performance of 287 companies in Brazil, Chile, Colombia, Mexico, and Peru, returned 7.4% for the period. Even more impressive was the S&P Latin America 40, which seeks to represent the 40 largest, most-liquid stocks in the region, as it returned nearly 10% for the quarter—meanwhile, the S&P 500 and S&P Europe 350 were down 0.8% and 2.1%, respectively.
So what were the drivers behind this performance? When we look at each country in the region, we can clearly see that Brazil was the biggest contributor to the overall performance. According to a report published by JP Morgan, Brazil’s significant decline in interest rates could potentially boost investment and consumption. Additionally, among the emerging market countries, Brazil is considered to have the largest earnings power. The report goes on to say, “Operational leverage is ongoing and the full benefit of lower rates (6.75% to 6.5%) is only now going to start to materialize. The BRL currency is seen as well anchored, especially considering the strong external position and high commodity prices.” The report mentions, “Money is flowing into EM and Brazil is a major beneficiary of that.” On the issue of the upcoming elections, “The investor consensus on the October [presidential] elections today is that whoever wins will need to implement reforms.” The country’s broad benchmark, the S&P Brazil BMI, had a strong quarter with an 11.5% return in USD. Companies like Petrobras and Banco do Brasil, among other Brazilian giants, had impressive returns for the first quarter. In fact, 8 of the top 10 performers within the S&P Latin America 40 were from Brazil. Mexico, the second-largest market in the region, did not fare as well. Plagued by the uncertainty around NAFTA and the upcoming presidential elections, the country’s flagship index, the S&P/BMV IPC, gave back nearly 7% for the quarter.
Among the other strong performers in the region were Argentina and Peru. Despite recent concerns around inflation increases in Argentina, there are great expectations for the country if it is promoted to emerging market status, which could result in greater investment in the country. At the end of the quarter, the S&P Argentina BMI returned 6.4% in ARS, with returns within the 50%-56% range for the three- and five-year periods. Despite the recent resignation of the nation’s president, Peru, the smallest market in the region, was still bullish in the first quarter, as the S&P/BVL Peru Select Index returned 4.7% in PEN; the index is designed to represent 18 of the most investable Peruvian stocks.
Chile and Colombia underperformed slightly in terms of their local currencies, but they outperformed in USD. Chile returned -0.8% in CLP and Colombia returned -3.7% in COP for the first quarter. All eyes are now turning to Colombia, which is expected to elect a new president during the upcoming elections on May 27, 2018. It will be interesting to see how the results affect the market.
In terms of sectors, energy and financials companies yielded the highest returns, as expected. The S&P Latin America Energy and the S&P Latin America Financials returned 21% and 17%, respectively.
To see more details about performance in Latin America, please see: S&P Latin America Equity Indices Quantitative Analysis Q1 2018.
 JP Morgan (JPM) Emy Shayo Cherman LatAm Equity Strategy: US Roadshow Feedback: Incredible Optimism with Brazil, March 14, 2018.The posts on this blog are opinions, not advice. Please read our Disclaimers.