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Why Are Latin American Equities Falling in 2Q17?

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Why Are Latin American Equities Falling in 2Q17? PART 1 OF 7

How Political Uncertainty Impacts Latin America’s Economic Performance

Latin American economies

In May 2017, Latin American (ILF) equities declined amid the political chaos within some of its member nations. These markets are considered more volatile than the developed markets (SPY) (QQQ), mostly due to the structural inefficiencies faced by its economies.

The chart below illustrates the performance of Latin American equities in 2017.

How Political Uncertainty Impacts Latin America&#8217;s Economic Performance

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Latin American index

As we can see in the chart above, Latin American market shares declined in May 2017. However, the US markets continued their upward trend in May. In 1Q17, the Latin American markets had seen a remarkable rise compared to the US market, mostly due to the rise in oil prices since 2016.

However, the slump in oil prices since the beginning of 2017 have resulted in losses for Latin American equities in May 2017, reversing some of the gains of 1Q17. The iShares Latin America 40 ETF (ILF) fell ~3% in May 2017 compared to an ~1% gain in the SPDR S&P 500 ETF (SPY).

Brent crude oil prices have declined ~16% so far in 2017 through June 13. The Latin American markets depend heavily on its commodities exports—including oil (USO), raw materials, and minerals (XME)—to global markets (ACWI).

Macroeconomic factors

In 1Q17, the activity in several economies within the region has been mostly subdued due to domestic struggles, including political and economic problems. In particular, the governance issue has been making economic recovery difficult in the Latin American markets in 2Q17. However, the strengthening of the exchange rates against the US dollar in some Latin American markets like Mexico (EWW) has eased the inflationary pressures in the region.

The decline in uncertainty related to US (SPY) economic policies and a gradual rise in its federal funds interest rate seem to be helping emerging markets (EEM) in 2017.

In this series, we’ll look at the economic performance of several Latin American countries.

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