Interview with Will Landers
Head of Latin American Equities at BTG Pactual Asset Management

In the emerging market equity space, Latin America stood out in 2020, but for the wrong reasons. The sector underperformed its emerging market peers by a wide margin through the end of November.

But it was in November when that seemed to change, much as the political landscape changed in the United States following the presidential election and talk of new economic stimulus and a weakening US dollar.

Latin America turned into one of the best performing regions in the world in November and is expected to maintain a strong performance in 2021, says Will Landers, head of Latin American equities at BTG Pactual Asset Management in New York.

The benchmark MSCI EM Latin America equity index, which tracks large and mid-cap stocks across six Latin American markets, fell abruptly in March, losing 52.6% of its value.

Image: Will Landers

By the end of October the index had recovered less than a third of its losses and was still down nearly 40 percent on the year, according to data provider Refinitiv.

Meanwhile, the broader MSCI Emerging Markets equity index was at the break-even point for the year at the end of October.

The small size of the tech sector in Latin America largely explains this regional underperformance, Landers said.

“Your typical old economy stocks didn’t do very well. Value stocks didn’t do very well. Commodity stocks stayed behind and financials, banks, weren’t doing very well, and that’s a lot of what we have in Latin America,” Landers said.

But in November Latin American stocks surged higher, lifting the benchmark index 21.9%, more than doubling the month’s 9.25% rise in the broader emerging markets equity index. At the end of November the Latin American MSCI index was off nearly 25% and continued to regain its footing into early December. The broader emerging market equities index was up over 12% for the year in early December.

“In November, Brazil was one of the best performing markets in the world. The Mexican peso, the Brazilian real, the Chilean peso were among the best performing currencies in the world”, Landers said. “Moves can be very abrupt, and you had very large companies going up 20%, 30%, 40% in a month.”

The reason? Foreign investors returned to the region. “During the month of November, you saw about 30 billion reais (worth) of foreign investors coming back to the Brazilian market,” Landers said.

This upswing in the region’s equity market is a consequence of a general “shift away from large tech to more value related names, whether financials, non-industrials or commodities, the companies that dominate the Latin American index,” Landers said. It also reflects an expected weakening of the dollar and renewed interest in financial stocks.

“With the expectation of a weaker dollar, emerging markets tend to be a place that people go to,” Landers said. “Commodities also tend to do better in a weaker dollar environment, and Latin America has a lot of commodities in their makeup of their index.”

As investors shifted out of tech, they looked to financial stock because fears about the impact of the low interest environment on the profitability of banks and of the crisis on their asset quality had subsided, Landers said.

“Programs around the world have helped keep SMEs afloat and consumers with money in their accounts, so you haven’t seen any type of huge asset quality deterioration anywhere in the world,” he said.

Financials currently make up 25.15% of MSCI’s Latin America equity index.

Landers foresees a continued improvement in the performance of the region’s equities in 2021. Key drivers include the positive news about the development and deployment of effective COVID-19 vaccines; robust economic growth in the region; and the prospect of a large economic stimulus package from the incoming administration of US President-elect Joseph Biden. This will increase expectations of a further weakening of the dollar, he said.

“Latin American commodity players will do well because of global growth. Banks will do well because they are getting back to the business of lending,” Landers said, adding that he also expects both online and brick and mortar retailers to do well. Even energy stocks could do well in a scenario of a fast recovery in which supply cannot respond quickly enough to increasing demand, he said.

“In this scenario, a well-diversified Latin American portfolio will do well,” he said.

However, the region’s equity market remains vulnerable due to its small size.

“Latin America is fairly small from a global asset allocation perspective, so if the story gets too complicated with too much political or environmental uncertainty, global investors aren’t going to look at it,” he said.

But Landers sees favorable developments in the four largest markets in the region. Mexico will be benefitting from the USMCA trade agreement; Chile is poised for one of the fastest recoveries because of commodity output; Peru’s political situation seems resolved; and in Brazil, voters are getting tired of the far right and the far left and are moving towards the political center, he said.

“The equity market in Brazil is alive and kicking, fueled by the low interest rate environment and the creation of a domestic equity culture; it’s probably the third most active after the US and China,” he said. “There’s a big pipeline for 2021.”