Falling interest rates in the US could provide a significant boost to emerging market economies in the coming months, particularly in Latin America, where some investors have a strong preference for the region.
However, Sean Taylor, chief investment officer at Mathews, warned investors not to act too hastily, reminding them that there is still a lot of uncertainty in Latin America.
The country’s commodity-driven markets – which rely on a favorable macroeconomic environment – could well perform better if interest rates fall, but their decline is coming from a much higher base.
The US Federal Reserve has suspended the key interest rate at 5.5 percent, but in countries such as Mexico and Brazil, interest rates remain at 10.75 percent and 10.5 percent respectively, despite interest rate cuts by their central banks at the beginning of the year.
Latin America’s dominance in the commodities sector certainly has its appeal in the long term – especially given its crucial role in important industries such as electric mobility and wind and solar technology. However, political instability in some of its key economies is likely to counteract this trend.
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This year, a new left-wing government came to power in Mexico and the Brazilian government intervened in state-owned enterprises, raising concerns about the country’s tax reform and budget control.
In the long term, the region may appear attractive – especially given its much lower valuation not only on global markets but also based on its own historical prices. But Taylor says it may be too early to make a judgment.
“Latin American equities are cheap for good reason,” he said. “Many markets are grappling with potentially significant changes in their national political landscape, and almost all will be influenced in terms of sentiment by the geopolitical noise that is being generated in the run-up to the U.S. elections in November.”
“The coming months will be an uncertain and bumpy road. Only when the global monetary environment eases and the domestic and foreign policy dust settles will the region’s economies and markets have a chance to develop at a meaningful level.
“We believe this justifies an approach that is conservative in the short term but also focused on capitalizing on strengthening long-term growth trends.”
