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How are stock markets in Latin America coping with coronavirus turbulence?

Kate Marshall, Senior Investment Analyst looks at how the coronavirus pandemic has affected stock markets, sectors and economies across Latin America, what the future could hold and what this could mean for investors.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

The coronavirus crisis has brought unprecedented challenges to economies around the world. Latin America is arguably one of the worst hit.

Now with more than 390,000 infections, Latin America’s largest nation, Brazil, is the most affected country in the developing world. Peru has almost as many infections as India, a country with a population 42 times larger.

Despite earlier optimism the region would get through the worst of the pandemic quickly, unfortunately the casualties have continued to rise.

Several Latin American nations have been criticised for their mishandling of the crisis. Some suggest this has contributed to the rising infection rate. Populist presidents in Brazil and Mexico, for example, have downplayed the seriousness of the virus. Brazil's President Jair Bolsonaro has even criticised state governors for imposing their own lockdowns and social distancing measures.

Other Latin American countries took swifter action. Peru and Ecuador were two of the first in the region to announce strict lockdowns, though infection rates there are still high. Colombia and Argentina have fared better after taking more decisive action. Costa Rica and Uruguay have also benefited from investing well in their public health services.

Similar to the rest of the world though, Latin American countries won't go unscathed and will see damage to their economies. What hasn't helped is that the region was already the world's slowest-growing economy, and the coronavirus crisis has exacerbated this.

Perhaps unsurprisingly, Latin American's tourism sector has ground to a halt, with areas including retail, restaurants and hotels also suffering. Its resources industry has taken a hit too. As a huge commodity exporter, the region has been hurt by severe oil price falls, reduced demand for energy and infrastructure development, and turbulence across commodity markets.

This article isn’t personal advice. If you're not sure if an investment is right for your circumstances, please seek advice. All investments and their income fall as well as rise in value, so you could get back less than you invest.

How have stock markets reacted?

Like other nations impacted by the virus, Latin America's stock markets have suffered. The broader Latin American market has fallen 35.0%* this year, compared with a loss of 2.3% for the global stock market, and 10.4% for the emerging markets as a whole. Some developed markets have already recovered previous losses, with the US market up 2.4% this year. It's a small gain, but it's a stark contrast to other global markets. As always, past performance isn't a guide to future returns.

Global stock market performance

Scroll across to see the full chart.

Past performance isn't a guide to the future. Source: *Lipper IM to 31/05/2020.

The way various government figures have dealt with the pandemic has been cited as a key reason behind the recent underperformance of Latin American markets. But it's not necessarily quite so clear cut.

Arguably Latin American countries were never well placed to deal with such a pandemic in the first place, regardless of who's in charge. For one thing, not all Latin American populations are as young as they're often believed to be. Brazil, for example, has quite a broad age range.

Countries like Brazil are also well-integrated with the global economy, which is likely to have contributed to the spread of the virus. Plus, most of Latin America isn't wealthy enough to have sufficient public health systems. So it gets the full effect of the virus, but without all the tools that many developed markets have to fight it.

Many Latin American currencies, such as the Brazilian real, have also been weak this year, and this has reduced returns further for UK-based investors.

What action has been taken so far?

While some Latin American economies have been slow to react to the crisis, the size of their responses varies by country.

Social distancing has generally been implemented across the board. Even in countries like Brazil where, despite pressure from the federal government, many state governors have introduced social isolation measures.

Monetary (money supply) and fiscal (government spending) policies have also been introduced in an attempt to limit the economic impact, though again this varies by country.

Mexico is forecast to be Latin America's worst-affected economy this year. The amount of spending by the government in an attempt to help has been particularly low compared with other countries. Meanwhile, Chile has one of the region's largest spending packages. President Sebastián Piñera has previously cut taxes in order to attract foreign investment, and now supports greater spending on health, more generous pensions, and increased social security.

Brazil also recently made a U-turn in its plans. Finance Minister Paulo Guedes previously insisted Brazil's economy would still grow this year, but the government has since announced emergency measures to help soften the blow of the pandemic. Money will now be freed up to help some of the most vulnerable people in society, help companies keep jobs filled, and go directly to combating the virus.

What happens next?

Like most other global stock markets, Latin American markets have recovered somewhat since they bottomed in March. But further bouts of volatility are likely. Much of the region was already in a relatively fragile state before the coronavirus took hold. But more recent financial stress, border closures, lockdowns and a halt in business activities could threaten to drag the region into recession this year.

In Brazil, Bolsonaro’s economic reform agenda had already made some progress, but this will need to continue in order to bolster the country's prospects. More broadly across the region, ongoing stimulus measures, such as further interest rate cuts to make borrowing cheaper, are likely needed to limit slowing growth.

Going forward, and in the near term, stock markets are likely to remain sensitive to daily news flow about the virus. Investors will likely want to see more confidence that we're approaching a peak in virus cases in Latin America. Or that we continue to see backing from major global governments and central banks to support domestic demand and economic activity.

What should matter the most to investors is the long-term outlook for the companies they invest in. Emerging markets, including Latin America, are still home to some exciting trends that are expected to develop over the coming years, even with events like this along the way.

These economies have already gone through a period of industrialisation, and now rising wealth could help towards the next stage of growth. These markets are also supported by hard working populations keen to catch up with consumers in the west. This could ultimately help companies across a variety of sectors, including technology, retail and financial services.

For investors prepared to accept the potential higher risks and volatility of investing in emerging markets, now could be an interesting time to look at Latin America. But we suggest only if a long-term view of at least five years can be taken.

Are Latin America's stock markets undervalued?

The recent setback means Latin American markets are some of the most undervalued in the world, according to our analysis. This essentially means many company shares can be bought at a price that is much lower than the future value of the company suggests it should be. If these companies can eventually meet investors' expectations and grow their earnings, then their share prices could later rise. There are no guarantees though, and there is still the potential for share prices to fall from current levels.

If the current coronavirus setback is temporary, investors could be looking at some real bargains. However, some companies might never recover from this episode. It's important to distinguish between companies that are lowly valued but for good reason, and those that will come back stronger.

Investors can invest in these markets through a fund run by a professional fund manager. These should be held as part of a diversified portfolio and they won’t be suitable for all investors. For more information, please refer to the Key Investor Information for each fund.

The team behind the ASI Latin American fund looks for companies with strong balance sheets, which are run by experienced management teams and have been able to survive volatile environments before.

This fund focuses on the main markets of Latin America, including Brazil, Mexico, Chile and Peru. Given the potential for higher volatility and risk, we think a fund like this should only be considered to form a small part of a wider investment portfolio, focused on long-term growth.

Find out more about the fund, including charges

ASI Latin American fund Key Investor Information

Read our latest full fund update on ASI Latin American Equity

Another option is a fund that invests broadly across the emerging markets. The iShares Emerging Markets Equity Index fund aims to track the performance of the broader emerging stock market, as measured by the FTSE All-World Emerging Index. This includes Latin American markets, though the fund also invests in other emerging countries, such as China, India, South Africa and Taiwan.

This is a more diversified fund featuring around 1,300 companies, but it’s still a higher-risk option and requires a long investment outlook.

Find out more about the fund, including charges

iShares Emerging Markets Equity Index Key Investor Information

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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