There have also been some concerns about potential tariffs under the new US administration and the direction of policymaking in Mexico and Brazil.
However, following this weakness, we entered 2025 with stock markets trading at attractive levels. In Brazil, for example, many stocks trade on single-digit multiples while paying double-digit dividend yields. The Brazilian real also saw a significant decline in 2024, making Brazilian exports much more competitive.
There are still risks in Brazil. The Government’s approach to fiscal policy has seen it lose credibility, with local and foreign investors requiring a higher return to lend to it. While it is possible to argue that the fiscal deficit in 2024 was better than expected, this outcome was largely driven by significant pressure from financial markets and includes numerous one-off revenues. Nevertheless, these risks are, in our view, largely priced into markets.
In the longer term, it is likely elevated rates in Brazil will lead to a decline in economic activity, less pressure on inflation and thus lower interest rates down the line. Lower interest rates in the US may also give the Brazilian central bank more flexibility. At the same time, the currency is supported by competitive exports and lower economic activity will keep a lid on imports. Any improvement on the fiscal side and/or lower interest rates could be the catalyst for a recovery in the stock market.
Mexico also struggled in 2024. The main source of weakness has been the new Government’s announcement of a highly controversial judicial reform that raises question marks about future judicial independence and the rule of law. Trump’s election victory and his vocal criticism of Mexico exacerbated the challenges later in the year. However, similar to Brazil, much of this is already reflected in the pricing of Mexican stock markets.
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Mexico and the rest of Latin America
As with Brazil, Mexican interest rates have remained higher than expected, with the benchmark rate still at 10% at the end of the year, even though inflation has dropped to around 4%. This should give the central bank scope for rate cuts in the year ahead. Donald Trump’s proposed tariff regime remains unclear, and could be a problem for key industries such as auto manufacturing. However, the longer-term trend of near-shoring supply chains is likely to continue and should boost the Mexican economy.
In Argentina, we are pleased to see that the country is back on a path towards economic orthodoxy, which we believe will significantly benefit society in the medium term. Nevertheless, the process of adjusting the Argentine economy is not easy, and we believe the situation is still delicate.
The whole region is benefitting from being relatively isolated from global geopolitical conflicts. It has sufficient geopolitical flexibility to trade with both sides. We believe that this will lead to both an increase in foreign direct investment and an increase in allocation from investors across the region. There are risks to investing in Latin America, but they are reflected in valuations, with lowly priced stocks and high dividend yields, and it is a region that has historically rewarded patience.
Sam Vecht is the lead manager of the BlackRock Latin American Investment Trust
The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.
