Marina Valentini is Global Market Strategist for JP Morgan Asset Management in Latin America and believes that investors are taking advantage of the global trend in artificial intelligence, the health sector and the strengthening of the middle class in emerging markets.
What does the low interest rate environment in Latin America mean for investments?
After two years of strong performance in 2022 and 2023, Latin American markets have faced difficulties, with equity returns declining and a significant depreciation of the region’s currencies.
(You may be interested in: Stock markets got off to a bad start in September, an unpromising month).
Tighter global conditions, renewed caution from Latin American central banks, and local political and fiscal risks have created volatility for the region’s assets this year. Although real rates in Latin America remain relatively high, lower domestic rates compared to a year ago and heightened local risk perceptions have led many investors to seek diversification in other global markets.
Investors are exploring opportunities abroad, such as capturing decade-high returns in global fixed income and taking advantage of structural trends in global equities related to themes such as Artificial Intelligence (AI), the healthcare sector and the rise of the middle class in emerging markets. The Latin American investor is increasingly interested in alternative investments.
Is the US market expensive?
The impressive performance of the US equity market in 2023 and the first half of 2024 led to elevated valuations for the S&P 500, which closed July with a price-to-earnings ratio of around 21 times.
Looking ahead, with US rate cuts and solid prospects for nominal GDP growth and corporate earnings, this should support US stocks. In the long term, investors should focus on companies that can benefit from rate cuts.
(Besides: US Federal Reserve reported an overall decline in economic activity).
Do you think the technology market or the Magnificent Seven are likely to collapse?
Even after the volatility at the start of August, the Magnificent Seven have outperformed the market. These technology-related companies have been boosted by AI-related headlines and strong earnings growth.
While their impressive performance has boosted the broader market, excessive stock rallies and 31 new all-time highs this year have raised concerns about a possible bubble. But the Magnificent Seven still have strong fundamentals. In the short term, caution is advised as markets may react sensitively.
How do you see central bank rates evolving?
Latin American central banks began their easing cycles earlier than the Federal Reserve, but have become more cautious as underlying inflation remains persistent in the region.
Differences in inflation and local risks mean that central banks in the region are moving at different speeds and in some cases have already paused their easing cycles, as in Brazil, which was already well advanced in its cycle. In contrast, Colombia’s high real policy rate, combined with falling inflation and fiscal adjustments, should allow for further normalisation of rates.
How do you see Colombia after losing its investment grade?
Although economic activity is expected to improve after a moderate growth of 0.6% in 2023, it is still expected to grow at a moderate pace in 2024, partly due to slow investment. Concerns about fiscal deterioration remain a priority for investors. While some investors may appreciate Colombia’s high real rates, the potential loss of the fiscal anchor will remain a source of risks and could generate volatility, acting as a headwind especially for long-term government bonds.
(Further: Nvidia says it does not abuse its market power: ‘We win on our merits’).
Idiosyncratic risk and tax concerns underscore the importance of international diversification for Latin American investors, who tend to have a significant bias toward their home markets.
HOLMAN RODRIGUEZ MARTINEZ
Portfolio Journalist
