Q2 2018 showed that volatility is king in Latin America. The first quarter saw strong returns for the region, with Mexico lagging. In the second quarter, we saw a practical wipeout of all gains for the year and a return to negative territory for Latin America. Recent presidential elections in Mexico and Colombia, as well as upcoming elections in Brazil brought economic uncertainty. Brazil, the largest market in the region, had a significantly tough second quarter. During this period, the country saw great currency depreciation, climbing inflation rates, as well as fiscal and political challenges that largely contributed to the region’s plunge. For the quarter, the S&P Brazil BMI was down 26% in U.S. dollar terms, while the regional S&P Latin America BMI and S&P Latin America 40 were down 18% and 19%, respectively.
It is indisputable that Latin America is going through major upheavals. However, in terms of indices, one of the factors with the biggest impact is currency fluctuations. All the local and regional indices saw sharp drops in performance when looking at U.S. dollar returns, while local investors saw a different picture of the region. A good example is the S&P MILA Pacific Alliance Composite, which excludes Brazil. The broad region of 141 stocks saw returns of -5% in USD for the quarter, but in Chilean and Mexican pesos, the returns were positive, up 2.7% and 2.5%, respectively. In Colombian pesos, the index was flat at 0.1% and in Peruvian nuevos soles, it was down 3%. This shows that, depending on where you are, currency plays an important part in index performance.
Despite the underperformance, there were some strong positive returns, particularly in Mexico and Colombia. The S&P/BMV IPC and S&P Colombia Select displayed strong performance in local currency terms, generating returns of 4.4% and 10.4%, respectively. Other pockets of positive returns were in the energy sector of the Pacific Alliance region, which returned nearly 4% for the quarter and 64% for the year ending June 2018 in U.S. dollar terms.
Volatility is the name of the game in Latin America, and it will be interesting to see what happens next quarter. So far, the presidential elections in Mexico have barely had any impact on the market, and in the first week of July, Brazil has come back to positive territory, but there are many weeks still ahead before the next quarter—stay tuned.
To see more details about performance in Latin America, please see: S&P Latin America Equity Indices Quantitative Analysis Q2 2018.
 The Pacific Alliance region includes Chile, Colombia, Mexico, and Peru.The posts on this blog are opinions, not advice. Please read our Disclaimers.