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The Macro Brief – LatAm’s moment?
952 Plays18 days ago
Joseph Incalcaterra, Daniel Lavarda and Jose Carlos Sanchez from our LatAm team look at what’s behind the pick-up in investor interest in the region.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/7FrWTv2
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Transcript
HSBC Podcast Series Introduction
00:00:02
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:14
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto to today's show.
Macrobrief Podcast & Latin America Outlook
00:00:34
Speaker
Hello and welcome to The Macrobrief, the podcast that looks at the issues driving financial markets around the world. I'm Aline Van Dyne coming to you today from our New York studio to discuss the outlook for Latin America.
00:00:47
Speaker
Now investors are very interested in the region. My colleagues across research are getting a lot of questions about Latin America, but also some flows are moving into the region. For example, some of the largest monthly inflows into Brazil's stock market recently.
00:01:04
Speaker
So what are the reasons? First of all, elections could introduce policy changes seen as supportive for markets. Secondly, Latin America benefits from a continued commodity rally.
00:01:16
Speaker
And third, the current geopolitical backdrop favours Latin America somewhat relative to other emerging markets. So is this Latin America's moment? I'm joined by three colleagues who can tell us more. Joseph in Calcaterra, our head of LATAM Macro Strategy.
00:01:36
Speaker
Daniel Levada, our head of economics research in Brazil. And Jose Carlos Sanchez, our Mexico economist. Welcome to the podcast. Thanks for having us. Thank you.
Why Invest in Latin America?
00:01:47
Speaker
Thank you. So Joseph, you've spoken to many investors in recent weeks about Latin America.
00:01:52
Speaker
Why are they so interested in the region? Yeah, i think there's a few things going on One, broadly, you can say that growth dynamics are quite resilient. you know External fundamentals are fairly strong compared to, let's say, other EMs or or past episodes in LATAM. But also we're in a year of or a few years of political transition.
00:02:10
Speaker
So we have numerous elections coming up and elections that have occurred over the last six months to a year have generally brought out changes that investors see as market friendly, right? This is the case in Chile. This is the case in Argentina. We have upcoming elections in Colombia, Peru, and also Brazil. And investors tend to think that these will go in the direction that that leads to reforms and market-friendly outcomes. So think that's the other reason. And then I'd say the last one is in a geopolitically complicated world, you could say that LATAM is a relative refuge, right? It's not related to the same geopolitical conflicts. It's not as trade-intensive. And actually, it gets some benefits from some of its commodity exports.
00:02:47
Speaker
So we'll delve a bit more later into sensitivity to oil prices, given that's such a big topic, of course, globally at the moment. But first, let's just get a bit more context about Brazil, which is, of course, the region's largest economy.
Brazil's Economic Analysis
00:03:01
Speaker
Daniel, what's the picture at the moment?
00:03:04
Speaker
Well, I think the picture is that things seem to be better positioned than you know the market was expecting. The current situation is that Brazil is basically in these late stages of the business cycle dynamics. The central bank acted. Now they are basically collecting the the results of that tightening. So in other words, economic activity has been decelerating, much do with that.
00:03:26
Speaker
ah Inflation has come down. But at the same time, you see more positive news coming from other sectors. For example, the current account, also the fiscal account seems to be somewhat more positive than the overall expectations. So in other words, yeah, it it seems that, ah you know, in broad strokes, Brazil is kind of a better positioned. And I would say that these dynamics are particularly good for the currency, right? Because you still have high interest rates because of any lingering inflation concerns, but growth is strong. The current account deficit, like Daniel said, is contained. So this is one of the reasons why we're so constructive on the BRL.
00:03:57
Speaker
Interesting.
Mexico's Export Resilience
00:03:58
Speaker
Now, Jose Carlos, Mexico is in a slightly different phase, correct? Yeah, absolutely. For 2026, it seems that some dynamics are changing for good.
00:04:10
Speaker
Exports prove to be more resilient. We think that will continue to be a good source of growth in this year. And in addition to that, it seems that nowadays the market has digested that Mexico seems to be in a relatively good spot with respect to the potential USMCA renegotiation with the US. So this is, of course, the trade agreement between US, Mexico and Canada.
00:04:34
Speaker
Exactly. and And given the very strong ties between these two economies, the US and Mexico, it seems that given the progress of Mexico in terms of some relevant policies for the US, such as migration, security, e etc., there there can be a stronger case to have ah a relatively good outcome, and that is kind of supporting.
00:04:57
Speaker
So are you, like Daniel, somewhat surprised with how things are going? Because I suppose the risks related to tariffs, to trade policy changes, those were considerable not that long ago.
00:05:10
Speaker
Absolutely. I mean, I think that ah Mexico's outlook seems more resilient than what we would have thought a few months ago. And there's a special appetite for some Mexican assets given these ah opportunities. Of course, there will be some challenges in the path, especially when we get into deeper conversations related to the USMCA. But it seems that many themes are kind of getting in good shape and and could be some opportunities. from there.
00:05:41
Speaker
And I would say for the currency markets, that's exactly it. It's really dependent a lot on the USMCA because as long as USMCA can kind of be renewed in some form, the other problems seem less severe. But if we were to see a surprise on that front, that would be the main risk for the MXN.
00:05:56
Speaker
So that's when are those discussions expected to really get into the weeds? Yeah, I mean, officially on July the 1st, we have the window opening. But it's a positive news that on March the 16th, there will be some preliminary talks to to kick off with this process between Mexico and the U.S. So ah it can be the case that some of those conversations are getting ahead of schedule. Okay, yeah. So watch this space pretty soon.
00:06:24
Speaker
Exactly.
Global Risks & Latin America
00:06:25
Speaker
And so let's just look at some of the the big risks that the global economy is facing. in In the last week, especially, of course, oil prices are front and center. There are ah discussions about stagflationary risks globally. Obviously, markets have been very volatile.
00:06:44
Speaker
How is LATAM positioned in that context? Joseph, perhaps you can kick off with a look at the market resilience, if any, and then Daniel and Jose Carlos. It would be great to hear how Brazil and Mexico are exposed to oil price changes.
00:07:02
Speaker
Yeah, that's a good question. I mean, when this first kicked off, um you know, we we understood that this would be a relative positive for LATAM. So not an outright positive, right, for LATAM assets, because clearly we had a spike in the dollar, we had risk-off across the world. So there were, you know, sell-offs in all the local markets. But almost immediately, we could start to see that outperformance starting to come through for for key currencies and and assets in the region. The one we liked the most was the BRL um because you know we think Brazil is not particularly sensitive to disruptions to trade flows or the Straits of Hormuz, while it does have you know positive net oil exports and is just generally seen as kind of a strong macroeconomic story. And I think we have actually been seeing that play out. in the markets. And I would say the same for the rest of the region, but it's not as clear cut.
00:07:46
Speaker
For example, Chile is a very big ah net importer of oil and gas. So is Peru. Mexico is as well, though to a very small extent. um So generally speaking, you know, in these types of scenarios with Middle East conflict, geopolitics, we think LATAM is a relative safe spot.
00:08:02
Speaker
But of course, if you mentioned the word stagflation, and if we were to see a spike in stagflation concerns, meaning sustained ah higher oil prices for a period of time, slowing in the global economy, that's ultimately bad news for that time.
00:08:14
Speaker
Of course, of course. And Daniel, Brazil, how does this backdrop and especially oil prices impact?
Oil Prices Impact on Brazil
00:08:22
Speaker
Brazil, oil exports have been increasing dramatically in the last decade two, right?
00:08:27
Speaker
There's a strong debate about the impact of oil prices in emerging market economies and how that's going to translate. Usually, it's like a bearish situation for for these emerging market economies, essentially because you have like ah higher oil prices than higher gasoline prices than higher prices in general. And therefore therefore, that means, for example, lower disposable income and lower economic activity, right? Lower consumption, all these kind of things.
00:08:51
Speaker
But at the same time, the case of Brazil, more specifically, you had a positive shock in the terms of trade. And in terms of trade is is essentially good for economic activity, right?
00:09:02
Speaker
So it's very hard to know exactly which one of those, um you know, effects is going to prevail at the end. And that that, of course, depends on the level, the final level of the oil price. At the current levels, it seems that we are more in the...
00:09:17
Speaker
relative positive, the the more positive side, right? Right, right. So in other words, um I think that the best way to look at is is what I find to be like the 10-10-40 rule for each $10 of higher oil prices that essentially translates into 10 billion higher trade balance, 10 billion BRL higher government revenue. So that's good for the external accounts. That's good for the fiscal accounts and 40 bps of higher inflation. So so clearly a risk that we need to keep a close eye on.
Oil Prices and Mexico
00:09:49
Speaker
of course, yes. And Jose Carlos, any particular sensitivity from the Mexican economic side?
00:09:56
Speaker
Not really. I mean, Mexico is an exporter of ah oil, crude oil, but it imports gasoline. So what we have seen in previous oil shock events is that on the one hand, you have oil revenues increasing, but then the government has to increase the effort to support domestic gasoline prices to avoid inflationary shocks. So there is this kind of offsetting effect that it's neutral on the fiscal side.
00:10:26
Speaker
and And also on the inflation, given these measures, there is a very small effect. But there is kind of an upside bias, now because as you know, given the very strong volume of trade in Mexico and how many goods are moved through trucks on the road, e etc.
00:10:46
Speaker
i mean, there's always this consideration to to avoid significant hikes in gasoline prices. But more of a neutral situation for Mexico. So that's that's interesting. absolutely And just, Daniel, you mentioned, obviously, the the kind of fiscal premium embedded. How important is that issue, especially in the context of the upcoming elections? I mean, could the fiscal risks come back to the forefront?
Brazilian Elections & Fiscal Policies
00:11:12
Speaker
Yeah, I think this is actually the key theme, at least from the economics perspective, going on to the elections. Of course, there's also the regulatory stuff and all this kind of government policies and all this kind of things.
00:11:23
Speaker
But in terms of the market pricing, there's a strong expectation that at some point in time, there's a correction being made. A correction, I mean, of course, a fiscal change.
00:11:34
Speaker
that would eventually imply Brazil would be would have a more sustainable sort of ah fiscal account moving forward, right? So this is actually the the relevant theme. Let's just end on what investors should be looking out for beyond the elections. Or is that the only thing investors should be worrying
Latin America Elections & USMCA Talks
00:11:53
Speaker
about? I mean, I was going to say, if there's one thing, it's the polls. Yes. OK. Polls, polls, polls. At for the case of Colombia, Brazil, Peru, the upcoming elections. And obviously, the health of the global economy is there. course. inflation will come up.
00:12:06
Speaker
But yeah, no, I think really elections are the number one for most of the region. would say for Mexico, it would probably be the USMCA. Yeah, exactly. For Mexico, I would really be monitoring USMCA talks. I think they will set the tone for years ahead. And also the US economy, now because of this intertwined relationship with Mexico, it's quite relevant as well.
00:12:29
Speaker
Right. Yeah. I mean, Mexico is still the biggest buyer of US goods. Exactly. It has become the the main seller and the main buyer. Okay, well, really interesting perspectives.
00:12:41
Speaker
Thank you all for the updates, and we will um continue to discuss as we get more insights onto some of these developments. Thank you so much for joining us here in New York.
00:12:53
Speaker
Thank you, Thank you. a pleasure.
HSBC Asian Market Insights
00:13:00
Speaker
A reminder that you can keep up to date on our latest reports and videos by downloading our app from Apple's App Store or Google Play. And please listen to our sister podcast, Under the Banyan Tree, where hosts Fred Newman and Harold van der Linde look at the issues driving Asian markets.
00:13:20
Speaker
Finally, if you've got any questions or comments, then you can get in touch with us at askresearch at hsbc.com. This week's Macro Brief was hosted by me, Aline Van Dyne, here in New York, and produced by Tom Barton, my colleague in London.
00:13:36
Speaker
Don't forget to like and subscribe to the podcast, and please share with your friends and colleagues. Thanks for listening. We'll be back next week.
00:14:06
Speaker
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