Latin America investors may be getting ahead of themselves. From a top-down perspective, the major economies there are not going to see the growth investors thought. At least not this year, warns Fitch Ratings senior director for the region Shelly Shetty.
They’re forecasting regional GDP to hit 1.3% in 2017, no thanks to Brazil and Venezuela. Brazil is still not growing over half a percent this year, judging by economist surveys by their central bank. And Venezuela’s economy is contracting yet again.
However, Shetty and her team report that growth in Argentina and Mexico will help. So far this year, the iShares S&P Latin America Index (ILF 27,45 +0,07 +0,26%) has beat the benchmark emerging markets index (EEM 40,84 +0,07 +0,17%) by around 400 basis points thanks in part to Mexico. The fund had some serious momentum in February, but ILF has come out of the clouds somewhat since. Investors are still in favor of ILF, though, and it remains trading over its 200 and 50 day moving averages.
Fitch has six Latin American dollar bonds on negative watch, including Brazil, Chile and Mexico. No country down there has a positive outlook for debt. Since the fourth quarter of last year, Fitch has downgraded risky sovereign bonds like Suriname, El Salvador and Costa Rica.
RIAs looking for yield might not mind. Suriname — a country no one ever hears about — launched a $550 million bond issue last October with a yield of 9.25% in dollars. It’s highly speculative with a B rating across the three credit watchdogs. In February, tiny El Salvador came to market with a $800 million issue but bond prices sold off in the last few weeks and yield is now around 8%. Costa Rica, rated BB like El Salvador, has dollar bonds yielding around 7%.
Mexico recently fooled consensus by standing down on interest rates. The peso is recovering. Most investors prefer Mexican debt over equities because their stock market is not very representative of the economy.
The iShares MSCI Mexico (EWW 66,95 0,00 0,00%) ETF is up 17% this year, better than ILF. All of the fund’s top five holdings are beating the market. Brazil banks Itau (ITUB 6,10 +0,05 +0,83%) and Bradesco (BBD 2,73 -0,10 -3,53%) are up 18% each; Fomento Economico (FMX 118,09 +0,43 +0,37%) in Mexico is up 19.8%; Brazil miner Vale (VALE 12,52 +0,32 +2,62%) is up 23.4% and even defensive AmBev (ABEV 2,42 -0,06 -2,42%), Brazil’s biggest beverage company, is beating the averages with its 17% YTD gain.