Interview with Scott Piper 

Head of Latin American Equities, Itaú Asset Management

Latin American equities made a comeback in the second quarter this year from a decline in the previous quarter, and the prospects for the rest of 2021 appear to be promising, Scott Piper, head of Latin American equities at Itaú Asset Management, tells LatinFinance.

The recovery was months overdue. Rising commodity prices and expectations of global economic growth should have led to gains earlier.

“Historically, this has been a region that is highly correlated from an equity perspective to the commodity cycle and the global economic cycle in general,” Piper says. “But over the last six months that correlation has completely broken down.”

Image: Scott Piper 

Commodity prices rose rapidly in the last quarter of 2020 and continued to do so in the first quarter of 2021, as optimism about a global rebound in the developed world mounted, particularly in the United States. Even so, the markets ignored this backdrop for Latin America, Piper says.

“The markets were focused more on the idiosyncratic events that were taking place in the region,” he says, referring to an “investor fixation” on Latin America’s political and social risks and “fiscal slippage” during the COVID-19 crisis.

Investors preferred Asia instead. “Given the strength in Asia, both in terms of its response to COVID-19 and also its exposure to the technology sector, managers just exclusively focused on Asia within emerging markets, and it became a consensus to underweight Latin America because it would be held prisoner to these idiosyncratic events throughout 2021,” Piper says.

While the MSCI Emerging Markets Latin America equity index tumbled 10% in the first two months of 2021, year to date, the MSCI Emerging Markets Asia equity index increased 7% over the same period, peaking at 12% in mid-February, according to data provider Refinitiv.

Toward the end of the first quarter, however, Latin American equities began to bounce back, with MSCI data showing that Mexico, the most stable and best performing in the first quarter, was the first to rally.

“AMLO has been very fiscally conservative, so the markets have been stable there,” Piper says, referring to Mexican President Andrés Manuel López Obrador.

In early March, Brazil’s MSCI shot up, the MSCI index shows. “Particularly in Brazil, we started to see a resurgence in equity behavior with the market becoming more stable and less volatile and being very stable even on risk-off days,” Piper says.

Piper attributes the turnaround to a strengthening of currencies in the region’s largest equity markets, Brazil and Mexico, which was prompted by a “dramatic improvement in trade terms,” he adds.

“We’ve seen commodity prices in some cases go astronomically high,” he says.

The rally also was triggered by a general weakening of the dollar on concerns of a rise in inflation during the rollout of the economic stimulus policy in the United States, he adds.

“A weakening dollar trend is highly positive for emerging markets, is highly positive for commodities, and highly positive for Latin America,” Piper says. “That is because foreign participation in Latin American equities is very dependent on dollar-based returns. So, equities can go up, but if you’re losing it all in the currency, foreign investors lose appetite.”


In Piper’s view, the prospects for the second half of the year are very good for the Latin American equity market.

“The terms of trade will really take effect in the second half of the year when global rest-of-the-world growth — not just in the United States — begins to kick in, strengthening currencies in the largest equity markets, Brazil and Mexico,” he says.

Another good sign is that the political waters have calmed in Brazil after a rocky first quarter, and the trade balance is expected to continue improving there, Piper says. “This should allow Brazilian equities to continue floating up, particularly on dollar-based returns.”

Mexico may even perform better. “Mexico is becoming a favorite emerging market country because it is leveraged to the United States,” he adds. “There’s a strong correlation between the US economic cycle and the Mexican economic cycle. In addition, there’s a lot of reshoring going on, with US corporates building manufacturing facilities in Mexico.”

Even so, political risk will continue to loom in the region in the medium term, Piper says. A leftist president seems to have won in Peru. The constitution is being rewritten in Chile. Political and social unrest has led to a rating downgrade in Colombia. In Brazil, the 2022 presidential race will likely be between conservative President Jair Bolsonaro and Luiz Inácio Lula da Silva of the leftist Workers’ Party.

“Politics is a growing risk for the region in general,” Piper says. “Some countries are going back towards populism and leftism, while the people in Mexico are challenging their leftist government. It’s not so much a question of left or right. People are going against whoever’s in power.”