uploads///Portfolio Composition of LatAm focused Mutual Funds

Developing a Strategy for Investing in Latin America Funds

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Nov. 20 2020, Updated 5:05 p.m. ET

LatAm-focused mutual funds

In this series, we’ve reviewed seven LatAm-focused mutual funds (BDERX) in terms of their sectoral changes over the past year and the possible reasons for their performances in 2016. We’ve looked at the sector and stock picks of each fund individually, and we’ve discussed which picks have worked and which haven’t.

We’ve also compared the performances of these funds with the iShares Latin America 40 ETF (ILF) to contrast active performances with a passive one.

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Macroeconomic environment in Brazil

After Brazil hosted a relatively successful summer Olympics, several segments of the country celebrated the impeachment of Dilma Rousseff. Bets on her impeachment were the primary reason for the surge in Brazilian equities. However, it’s now up to the not-so-popular Michel Temer government to ensure that the party in Brazilian equities continues.

Data from BM&F Bovespa show that foreign investors took 1.5 billion Brazilian real out of stocks in August 2016, the first net outflow in three months. It seems that foreign investors think that the surge in Brazilian equities is over, at least for now.

However, some macroeconomic trends suggest that economic indicators, including economic output, may be hitting their bottoms, and that 2017 could see the Brazilian economy doing much better than it has in the past three years.

Another aspect to consider is US monetary policy. If it remains benign, Brazil (EWZ) may see overseas money pouring in.

Macroeconomic environment in Mexico

With so much happening in Brazil, we’ve hardly talked about Mexico (EWW). Things aren’t smooth there either. Recently, the country’s central bank reduced its economic growth forecast for 2016 for the fourth time. It now expects the Mexican economy to grow in the range of 1.7%–2.5% for the year instead of the 2%–3% it forecast earlier. Economic growth projections for 2017 have been reduced as well.

Ratings major Standard & Poor’s has cut its outlook on the country’s BBB+ rating to BBB- due to its increasing debt burden and lackluster economic growth.

Your LatAm strategy

The rise in Brazilian equities has been driven by sentiment, not fundamentals. At this point, it seems that investors could begin taking a small exposures to LatAm equities with a focus on the long term, while focusing on passive funds (ILF) to gain from the sentiment-driven run in Brazilian stocks. Mexico shouldn’t be out of bounds, though, because even at this point, it’s fundamentally better placed than Brazil.

Investors should be careful about financials (BBD) (BSAC) (ITUB), though, because they’ve had a tremendous run-up, and though there may be more to come, fundamentals could catch up with these stocks soon.

In an earlier series, we did a similar analysis on international mutual funds. For more analysis on mutual funds, you can visit Market Realist’s Mutual Funds page.

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