This quarter has brought mixed expectations for the region. The quarter itself resulted in overall positive returns. However, Latin America is still in the red for the year. The S&P Latin America 40, a widely used benchmark for the region, ended the quarter strong with a return of 6.4%. The countries that contributed to this upturn were the two largest markets in the region: Brazil and Mexico. In USD terms, the S&P Brazil BMI returned 5.1%, and in Mexico, the S&P/BMV IPC returned 10.3% for the quarter.
As 2018 enters its last three months of the year, many uncertainties from the earlier months have begun to unfold. Elections in many Latin American countries have concluded, with new leaders in Mexico, Colombia, Chile, Peru, and soon in Brazil. Despite many controversies, the markets have responded positively to their respective elections. In Mexico, NAFTA has been replaced by a similar agreement called the United States-Mexico-Canada Agreement (USMCA). This is good news for Mexico, causing a rally in the country’s equity market at the end of the quarter. Brazil is in the midst of presidential elections, with the first round concluded on Oct. 7, 2018. As predicted, the far-right presidential candidate Jair Bolsonaro won the first of two rounds of elections. In general, his win is seen as more favorable to financial markets compared with the other candidates. This also yielded a rally in the country’s equity market. The other countries did not fare as well when looking at USD returns for the third quarter, with Colombia showing the largest losses, followed by Peru, Chile, and Argentina.
It is interesting to note the important role currencies play in index returns. In the S&P Colombia Select, the S&P/BVL Peru Select, and Chile’s S&P/CLX IPSA, the returns in USD and local currency were not that different. However, in other markets like Brazil or Argentina, currency exchange rates had a greater impact. In Brazil, the local return of the S&P Brazil BMI was almost double compared with the USD return: 9.0% versus 5.1%, respectively. The most dramatic difference was in Argentina, where the USD version of the S&P Argentina BMI was almost flat, at -0.48%, and in ARS, the index soared to 40.7% for the same period. In Mexico, the currency exchange rates had the opposite effect. The S&P/BMV IRT showed better performance in USD than in MXN, with returns of 10.8% and 4.3%, respectively.
Other noteworthy highlights for the quarter saw Energy, Materials, and Financials emerge as the top three sector performers, as measured by the S&P Latin America BMI sector indices. The sectors returned 12.5%, 8.2%, and 6.6%, respectively. Not surprisingly, three of the five best-performing stocks in the S&P Latin America 40 for the quarter were from Energy: Colombia’s Ecopetrol rose 31%, and Brazil’s Petrobras ON and PN shares were up 23% and 18%, respectively.
Besides returns, several indices have shown strong dividend yields for investors seeking income. As expected, indices focusing on dividends and real estate had the highest generating yields. The S&P Dividend Aristocrats® Brasil Index had a yield of 7%. Similarly, in Mexico, the S&P/BMV FIBRAS Index had a yield of nearly 8%. The S&P/BVL Peru Dividend Index had the highest yield of all the indices in this report, with a yield of 8.2%.
So far, this year has been full of ups and downs, and the third quarter brought a bit of hope to investors in the region. There are still three more months to go before the year ends, and as things begin to unfold, it will be interesting to see what is left for Latin America—hopefully one more upswing.
To see more details about performance in Latin America, please see: S&P Latin America Equity Indices Quantitative Analysis Q3 2018.