Mexico and Brazil together account for approximately 75% of the holdings exposure in Latam ETFs (e.g. GML, ILF) and almost 30% of global emerging markets ETFs (e.g. EEM, VWO). A strengthening of the currencies in these countries will benefit investors in USD since the local market return will be augmented by the currency appreciation gains.
The theme for 2012 in Latin America was coined by HSBC as “Runners versus Walkers”1. The walkers were the economies whose growth slowed down significantly, such as Brazil, Argentina and Venezuela. The runners were the likes of Chile, Mexico and Peru, whose economies rebounded strongly in 2012. The GDP growth gap versus the runners was as wide as 2.7% in the third quarter of 2012 but is expected to reduce to 1.3% by the end of 2012.
Foreign exchange rates are driven by several factors, such as inflation, interest rates and relative demand for the currency. With the exception of the Brazilian Real (Brazil is a very closed economy), the fluctuations of most Latam currencies are highly dependent on the US Dollar since the United States is generally their largest trade partner. While Latam exchange rates are usually compared against the US Dollar, comparing them versus each other Latam currencies reveals interesting relative trends among the countries.
The graph above is based on a monthly data release by the Peruvian Central Bank which compares the Peruvian Nuevo Sol (PEN) versus other major Latam currencies. Values above 100 imply the foreign currency gained purchasing power relative to the PEN sinc39e 2009 (index’s base) while values below 100 imply the opposite. The data shows that the Colombian Peso remains strong and Brazil improved significantly in January. The Mexican Peso is maintaining its steady appreciation trend started mid 2012.
Aside from regional or emerging market focused ETFs, investors may want to invest at the country level, e.g. EWZ (Brazil) or GXG (Colombia). Market valuations in Brazil are much lower relative to Mexico, making a great candidate to capitalize on growth; additionally, the Brazilian economy’s independence from the U.S. makes it a great market for diversification, though it has become more and more dependent on China in recent years as the “South-South” trade increased.
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