Mexico’s Trump-Fueled Rout Belies Latin America Markets Bonanza

  • Brazil stocks, currency among world’s best performers in 2016
  • Mexico peso has tumbled 15% this year amid Trump trade threats

Mexico has dominated headlines from Latin America in 2016 thanks to the market swoons sparked by U.S. president-elect Donald Trump. But the region has been far from a money-loser.

In fact, five of the year’s 10 best-performing stock indexes can be found there, led by the 61 percent surge in Brazil’s Ibovespa through Wednesday. Four of the top 10 developing-nation currencies hail from the region. In the bond market, Venezuela has handed investors some of the largest gains in the world, with its debt returning 54 percent.

Despite the pall over Mexico and prospect of higher U.S. interest rates, Latin America watchers like Ashmore Group Plc’s Jan Dehn expect investments in the region to pay off handsomely in 2017. He says Brazil looks poised to lead the way again as its economy -- the region’s largest -- rebounds and policy makers chop borrowing costs, luring investors to its financial markets. Argentina and Peru, buoyed by business-friendly presidents and rebounding commodity prices, are also seen as destinations for potentially lucrative trades.

“Latin America will recover more than other regions in GDP terms and do more reforms,” said Dehn, a London-based head of research at Ashmore Group, whose top pick is Brazil.

President Michel Temer’s push to pass spending and pension overhauls is another reason investors remain bullish on Brazil. The real has jumped 19 percent this year, the second-largest advance in the world, helping bolster returns in local bonds. It will soar another 10 percent by the second-quarter of 2017 before weakening to 3.4 per dollar by year’s end, according to Gustavo Rangel, the chief Latin American economist at ING Financial Markets LLC and the region’s top currency forecaster last quarter, according to Bloomberg rankings.

While Brazil’s prospects continue to improve, Mexico’s outlook is more mixed. Trump’s pledges to rip up the North American Free Trade Agreement and build a wall along the southern border have unsettled investors in assets from the region’s second-biggest economy, with the peso plunging 16 percent this year. Mexico sends almost 80 percent of its exports to the U.S.

“Next year presents us with a very uncertain outlook,” said Rogelio Ramos, an equity sales trader at Interacciones Casa de Bolsa SA in Mexico City. “It’s the trade issue that is worrying. The taxes and tariffs he wants to impose on Mexico, the renegotiation of NAFTA, the migration policy, should all be taken seriously.”

Pessimism toward Mexico isn’t universal.

The country’s stocks and currency were actually the top investor picks for 2017 in a survey that UBS AG conducted at an emerging-market conference last week. Still, it was far from a consensus view: more than 10 percent of respondents said they expected Mexico to be the worst-performing major market next year.

The country is also facing possible downgrades by all three major credit-rating companies as it struggles to rein in its soaring debt load and shore up the finances of its state-controlled oil company Pemex.

Still, the greatest risk for investors in Latin America will likely remain Venezuela. The crisis-ridden country managed to stave off default for another year, gifting a windfall to distressed-debt investors. But its collapsing economy and rising political tensions will test the government’s ability to make good on its obligations in 2017.

Elsewhere, Argentina appears poised to continue benefiting from President Maurico Macri’s decision to end a decade-long battle with creditors and remove most currency controls just months into his first term. The nation’s bonds returned 6 percent this year while its benchmark Merval stock gauge jumped 19 percent.

In Peru, the election of Pedro Pablo Kuczynski, a former finance minister and Wall Street veteran, as president in June has also bolstered demand for the nation’s assets. The Andean nation’s bonds have returned 11 percent this year, above the emerging-market average of 8.7 percent.

“Argentina did more reforms in six months than in the past 20 years; Brazil is cleaning up its politics and passing the deepest fiscal reform in its history as a constitutional amendment; PPK is improving the outlook in Peru,” Dehn said. “The improvement we are now seeing in governance in Peru, Brazil and Argentina mean that fundamentals are getting much better.”

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