Our Chief LatAm Equity Strategist Nikolaj Lippmann discusses why
Latin America may be approaching a rare “Spring” moment – where
geopolitics, peaking rates, and elections set the scene for an
investment-led growth cycle with meaningful market upside.
Read more insights from Morgan Stanley.
----- Transcript -----
Nikolaj Lippmann: Welcome to Thoughts on
the Market. I'm Nikolaj Lippmann, Morgan Stanley’s Chief Latin
America Equity Strategist.
If you ever felt like Latin America is too complicated to follow,
today's episode is for you.
It's Monday, February 9th at 10am in New York.
The big idea in our research is simple. Latin America is facing a
trifecta of change that could set up a very different investment
story from what investors have gotten used to. We could be moving
towards an investment or CapEx cycle in the shadow of the global
AI CapEx cycle, and this is a stark departure from prior consumer
cycles in Latin America.
Latin America's GDP today is about $6 trillion. Yet Latin
American equities account for just about 80 basis points of the
main global index MSCI All Country World Equity benchmark. In
plain English, it's really easy for investors to overlook such a
vast region. But the narrative seems to be changing thanks to
three key factors.
Number one, shifting geopolitics in this increasingly global
multipolar world. We can see this with trade rules, security
priorities, supply chains that are getting rewritten. Capital and
investment will often move alongside with these changing rules.
Clearly, as we can all see U.S. priorities in Latin America have
shifted, and with them have local priorities and
incentives.
Second, interest rates may very well have been peaking and could
decline into [20]26. When borrowing cost fall, it just becomes
easier to fund factories, infrastructure, AI, and expansion into
all kinds of different investment, which become more feasible.
What is more, we see a big shift in the size and growth of
domestic capital markets in almost every country in Latin America
– something that happens courtesy of reform and is certainly new
versus prior cycles.
And finally, elections that could lead to an important policy
shift across Latin America. We see signs of movement towards
greater fiscal responsibility in many sites of the region, with
upcoming elections in Colombia and Brazil. We have already seen
new policy makers in Argentina, Chile, Mexico, depart from prior
populism.
So, when we put all this together -- geopolitics, rates and local
election -- you get to the core of our thesis, a possible LatAm
spring; meaning a decisive break from the status quo towards
fiscal consolidation, monetary easing, and structural reform. And
we think that that could be a potential move that restores some
confidence and attracts private capital. In our spring
scenario, we see interest rates coming down, not rising in a
scenario of higher growth to 6 percent in Brazil and Mexico, 7
percent in Argentina, and just 4 percent in Chile. This helps the
rerating of the region.
There's another powerful factor that I think many investors
overlook, and that is a key difference versus prior cycles, as
already mentioned. And that's the domestic savings. Local
portfolios today are much bigger, much deeper capital markets,
and they're heavily skewed towards fixed income. 75 percent of
Latin American portfolios are in fixed income versus 25 percent
in equity. In Brazil, the number's even higher with 90 to 95
percent in fixed income. If this shifts even halfway towards
equity, it can deepen and support local capital markets; it
supports valuation. For the region as a whole, sectors most
impacted by this transformation would be Financial Services,
Energy, Utilities, IT and Healthcare.
Up until now, I think Latin America has been viewed as a region
where a lot could go wrong. We asked the reverse question. What
could go right? If the trifecta lines up: geopolitics, peaking
rates and elections that enable a more investment friendly policy
and CapEx cycle, Latin America could shift from being seen mainly
as a supply of commodities and labor to far more investment
driven engine of growth.
That's why investors should put Latin America on the radar now
and not wait until spring is already in full bloom.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen to the podcast and share Thoughts on
the Market with a friend or colleague today.
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