Against a challenging backdrop for emerging markets, Latin America is the only region which should do better than in 2018. Brazil, Colombia and Peru in particular are the most promising markets in terms of growth acceleration (Fig.1).
Fig.1 - Relative to 2018, Latam will lead the way among Emerging Markets
Real GDP growth change: 2019 forecasts less 2018 estimates (%Y/Y)
Source: Pictet Asset Management, CEIC, Datastream, January 2019
Chile won't repeat the performance of 2018 but growth is still projected to remain strong in 2019, as illustrated by the absolute numbers in Fig.2 below.
Fig.2 - Latin American growth led by smaller, andean countries
LatAm actual & forecasted real GDP growth
Source: Pictet Asset Management, CEIC, Datastream, January 2019
In absolute terms, Latin America’s GDP growth rate in 2019 (2.6%) should outperform that of the EMEA region (2.0%), the first time since 2013.1
Inflation in the region should remain within targets, in spite of risks such as falling commodity prices, enabling policymakers to continue accommodative monetary policies.
A new period of political stability
Elections took place in all four countries between 2016 and 2018, meaning that this year should be clear of any major political instability.
The elections have led to the establishment of more conservative governments willing to reform the public sector and to stimulate the economy through long-term policies. Colombia, for instance, has reduced corporate tax. In Chile, new laws are being introduced to speed up the process of setting up new businesses. In Brazil, one of President Jair Bolsonaro’s top priorities is to cut down public spending.
CHINA'S RISING PREDOMINANCE
But one risk is looming for these countries: their increasing dependency on China for exports, especially in the current context of global trade tensions. As illustrated in Fig. 3 below, China is the main trade partner for Brazil, Chile and Peru.
For all four countries, albeit to a lesser extent for Colombia, exports to China have been on the rise since 2000 (Fig.3.). Over the same time period, exports to the US have slowed down, especially for Colombia (Fig.4.).
Fig.3 & 4 - Exports to China are on the rise; Exports to the US have slowed down
Fig. 3 (left) - Exports to China as share of total country's exports and top trade partners / Fig.4 (right) - Exports to the United States as share of total country's exports
Source: Pictet Asset Management, CEIC, Datastream. *Percentage of the country's total exports, based on August 2018 data available as at 31.12.2018.
China has extended its influence globally and increased imports of commodities such as metals, or cereals in the case of Brazil to satisfy domestic demand. This has allowed Latin American countries to diversify trade partners away from neighbour countries. Meanwhile the US has imported less oil as it has ramped up domestic production, impacting Colombian exports.
What to watch in 2019
Source: Pictet Asset Management, January 2019
In conclusion, Latin America’s economic growth should be stronger this year than in 2018, mainly driven by smaller countries such as Chile, Colombia and Peru. Brazil, the region’s largest country, will also grow, although at a more moderate pace. All of these countries have new governments in place with credible plans from an economic standpoint. Despite risks such as growing reliance on exports to China and inherent dependence on commodity prices, we believe these countries will provide opportunities for long-term investors.
CHART FROM OUR EMERGING CORPORATE BOND TEAM
By Karen Lam, Senior Client Portfolio Manager
From a bottom-up perspective, we see attractive opportunities in commodity-related names. Given these are exporters, they tend to benefit from local currency depreciation. This is one of the reasons why we have given commodities a 7% overweight in our EM corporate bonds portfolio.2
Another sector that has appeal in Latin America is the pulp and paper sector, particularly in Chile and Brazil, based on relatively strong price fundamentals.
Fig.4 - In Latin America, the pulp and paper sector is a sector where we see investment opportunities
Latin America corporate hard currency bonds universe by industry and sensitivity to FX moves
Source: JP Morgan, as at 31.12.2018. Data taken from the LatAm only part of the JPM CEMBI DB index.
Anjeza Kadilli joined Pictet in 2015. She is an Economist in Pictet Asset Management’s Economic Analysis team where she conducts macroeconomic analysis of emerging markets. Anjeza holds a PhD in Econometrics from the University of Geneva - where she also obtained an MSc and BSc in Economics. During her PhD, Anjeza spent time at the University of Southern California, Riksbank and HEC Montreal as a visiting scholar.
About
Karen Lam
About
Karen Lam
Karen Lam joined Pictet Asset Management in 2013 as a Senior Client Portfolio Manager in the Fixed Income Emerging Corporate team and is based in London.
Prior to joining Pictet Asset Management, Karen was an Executive Director at J.P. Morgan Asset Management working as a global rates portfolio manager and later as a senior client portfolio manager covering fixed income total return strategies and emerging market debt funds. Previously, Karen was the lead manager research analyst at J.P. Morgan Private Bank covering fixed income funds.
Karen holds an MBA from the University of Chicago Booth School of Business and an MSc in Epidemiology from Imperial College London.
About
Patrick Zweifel
About
Patrick Zweifel
Patrick Zweifel joined Pictet in 1997. He is Chief Economist at Pictet Asset Management. Before assuming his current position in 2009, he was head of the “Macro Research Team” at Pictet Private Wealth Management. In particular, he had economic research responsibility for emerging markets and Japan, and for the development of quantitative models on major asset classes, primarily foreign exchange models. Before joining Pictet he was a research assistant in econometrics and monetary theory and worked on international research projects for the World Bank and the European Union. He holds a PhD in econometrics from the University of Lausanne.
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