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Stephen Rudman: Good morning and good afternoon. This is Stephen Rudman at the New York office. I'm part of Ashmore’s Distribution team here in the United States. Welcome, all. Happy that you could join today's webinar. 

Today's topic, which we think is really timely, is why investors shouldn't dismiss Latin America. We’re certainly dealing with a very dynamic time and space for those of you invested. Certainly, there have been some nice returns from Latin America in 2023, and things are certainly encouraging as we move forward. But additionally, we've got some very interesting things happening in Argentina and elsewhere that we think will make for some good conversation around the broader Latin American outlook here for 2024.

So, I'd like to turn it over to Alexis to lead the conversation about LatAm today. Alexis and Gus, welcome. Thank you for your time and the floor is yours. 

Alexis de Mones: Great, thank you very much Stephen, and good afternoon, Gustavo. So, today we are having a tour of the region with you. You were in Latin America at the start of the year, and you travelled through a number of different countries, including your native Brazil. So you're best placed to walk us through some of the recent developments. 

I want to start with the political developments, and then go into economic developments, investment implications and investment ideas. But first, let's start with the political developments, recent and upcoming, and the investment implications from various elections and other events.

Gustavo Medeiros: Absolutely. Thank you very much. We've actually been telling investors for two or three years now, including investors in Latin America, that the political risks of the leftist parties returning to power, or coming to power in the case of Colombia, were a little bit overblown. We thought that congresses would check the power of the executive and we could actually have a much more market-friendly administration from the leftist governments, which we have. 

As a matter of fact, Chile right now is discussing a mini pension plan reform, which has slightly more benign elements than people feared, and there was no change in the constitution. Gustavo Petro in Colombia became a lame duck in year one. Peru is still very institutionally unstable from an executive power perspective, but in terms of implementation of economic policies, the country has been well managed by technocrats, and the checks and balances of Congress are working. It's the same case in Brazil, where the previous administration tried to get re-elected and increase the fiscal deficit a little bit – something that we don't see very often in Brazil. But now Lula is actually a fiscal consolidation. So, if anything, the region is starting to point to the right, as we've seen in Argentina, with Javier Milei getting elected with a landslide. He is again being pragmatic. Instead of trying to change the political system in Argentina, he's winning friends in Congress or getting together with Juntos por el Cambio, the party of his competitors.

Alexis de Mones: And he's had a major legislative victory over the weekend, right? Passing his Omnibus bill in Congress.

Gustavo Medeiros: Yes, now they need to discuss the bill in the Senate, but it was a major victory indeed and a pragmatic one. 

So, LatAm, if you think about it from a geopolitical risk standpoint, is a little bit of a safe haven. You don't have any major geopolitical risks in the region. When we discuss Venezuela Guyana, it's almost a little bit of a joke: how can Venezuela try to get any territory? And obviously, it is something the other countries in Latin America wouldn't allow. So the landscape is much more benign than people feared, and I think that's one of the reasons why investments in Latin American fixed income and particular local currency bonds – and more recently equities – have been actually outperforming.

There was across these electoral cycles where the left centre and left parties came back to power, there was a lot of fear, including local outflows from these markets, with investors worried about developments in the political space that didn't take place. When you look back, you see there's very high carry, very good investment opportunities and markets have been volatile abroad. In particular, even the hegemon markets have been quite volatile since 2022. So I think that there's quite a lot of repatriation or fewer foreign flows that have been supported by this more benign economic and political environment.

Alexis de Mones: Yes. So, in terms of politics, and geopolitics, you discuss distance from conflict, the more time zones you are away from conflicts as you posit, the better off you've been in recent quarters in Latin America. So, there is no risk of war, but definitely, to the contrary, a bit of a maybe rapprochement between parts of Latin America and the United States (US). I know that the US administration has tried to be more involved with Latin America and defend their interests there a little bit more forcefully, something you know very well. But I think they've made an effort to operate a rapprochement with Venezuela, with Maduro's government. The US finally came to the realisation that sanctions don't really work and that there was no alternative to Maduro's rule in Venezuela. So, as we're involved in this particular market, do you want to add a couple of words to that? What's your sense of the US pressure on Maduro, is it lifting? 

Gustavo Medeiros: Many people were surprised last year, after OFAC (the Office of Foreign Assets Control) elected to lift sanctions, first on oil and gas and mining investments, and then on the secondary trading of euro bonds in Venezuela, which allowed bonds to rally quite significantly.

There is also the process of recovery of Venezuelan assets in the US in particular, which has been evolving. But I think what investors are eyeing here, or what is important, is that in 2024, you have the potential for elections to be called in Venezuela, most likely in the second half of the year. And the US is willing to work with Maduro to facilitate some sort of free and fair elections. And it doesn't necessarily have to be with the political actors that we know at the moment or are disputing, but as Gustavo Petro mentioned, apparently, in Colombia, it's about the process and how free and fair these elections are. 

I think, as we've been discussing, the key developments here are the lifting of sanctions, which would potentially lead to an election process which would be more western-friendly or acceptable. Together with that, you could have index inclusion, and ultimately, that's a milestone that is in between here and the elections. Post-elections, we could potentially discuss lifting the sanctions in the primary market on euro bonds and then eventually debt restructuring, which would be very benign. So I think those are the main milestones that we're discussing.

Alexis de Mones: Yes. Well let's go through the election first and see how free and fair they are and if they're acceptable for this rapprochement to have legs. But certainly very encouraging. So, one other important political development and the largest probably election coming up in the region this year is the election in Mexico. Maybe you can describe to us the risks and opportunities that this particular election contains?

Gustavo Medeiros: Yes. It feels to me like the election in Mexico, specifically in June, is going to be a little bit of a win-win because AMLO cannot run for re-election. His populist policies, in particular intervening on concessions on roads, airports and railways, are likely to be out of the way. He just proposed 20 'reform’ measures to parliament that were not market-friendly at all. 18 out of these 20 reforms needed a two-thirds majority. So they're most likely dead in the water because the Moreno Party doesn't have the two-thirds majority today. But I think that lifting this populist uncertainty is going to be very positive for Mexico. And importantly, his successor, Claudia Sheinbaum, is a much more market-friendly potential president. She is more of a technocrat, and she was mayor of Mexico City.

I think that a lot of AMLO's sound fiscal policies will remain, but with a more market-friendly environment, including support for Pemex. But the main risk is not the Mexican election but the US election in November, which will bring the fear of Trump coming back to power. That has already been driving a little bit of turmoil in Mexican assets over the last couple of weeks. 

In our view, that fear is also a little bit overblown because the main risk for Mexico in 2016 was the renegotiation of NAFTA, a key trade agreement with the US and Canada that allowed for major development of the Mexican economy since 1994. But Trump renegotiated NAFTA to USMCA, and actually not much changed in terms of the main underlying factors.If anything changes at the margin were quite positive to Mexico. I don’t expect to see Trump trying to renegotiate that deal again, especially as it was a deal he negotiated. So it's primarily my view the US election is going to be about immigration, and most of the immigration that is coming from Mexico, it's not actually Mexicans anymore; it's immigration from other Latin American countries, including Venezuela, and Central American countries. So, I think that has fewer implications for Mexico and in my view, if Mexico wobbles as a result of election risk, both within Mexico and in the US, it could be an opportunity.

Alexis de Mones: Great. Okay. So enough with the politics, maybe changing tack a little bit, can we discuss the economic performance of the region, both in 2023 and looking through 2024? What are the main takeaways and risks and driving futures?

Gustavo Medeiros: As we've discussed many times, one of the biggest surprises of 2023 in Emerging Markets was GDP growth in Latin America. At the beginning of the year, market participants on average expected LatAm growth to be close to 1%, and we're going to end 202, close to 2.6%, but we found upside bias to that. 

In 2024, we are already getting a lot of revisions over the last months, people initially expected something around the lines of 1.5% three to six months ago. Now we're talking about two percentage points, with inflation actually surprising to the downside. 

Some of that is related to fiscal policy. In Brazil, we had a fiscal expansion that was contracted during the election process, which was important. But a lot of Latin American countries like Chile, Peru and Colombia were consolidating their fiscal deficits in 2024. 2023. And Mexico didn't do much. So, overall, since the Covid shock, Latin American countries and Emerging Markets as a whole dealt with the economic consequences of the Covid shock in much better shape, as fiscal expansion was much more moderate than in the developed world. Central banks reacted promptly once inflation risks started to increase in early 2021. As a result of that, after the massive fiscal expansion in 2020, finance ministers started to tighten fiscal policy earlier, in 2021 and 2022. So, we actually had a much more benign fiscal monetary policy balance in LatAm, which allowed for better than expected growth, lower than expected inflation, and fiscal balances that were, at the margin, okay. 

Of course, you still have some risks in Brazil, in Colombia and in Mexico, where this year the fiscal deficit is widening a little bit because of Pemex. Mexico’s government is essentially backstopping Pemex and assuming a lot of the liabilities in the state-owned oil and gas company. But again, it's minor considering Mexico did zero fiscal expansion in 2020 and 2021. 

Finally, LatAm's current account deficits are in very good shape because terms of trade are doing okay, and there have been quite a lot of productivity gains within export-led LatAm industries. So, LatAm is in pretty good macro shape, I would say.

Alexis de Mones: I like to say that in developed economies, we had two shocks: the supply shock and the very strong stimulus resulting in a demand shock. So, inflation is lasting longer, which is why central banks in developed economies have kept rates high for longer, whereas in EM you had a supply shock but not so much of a demand stimulus. That's why they've come out of this inflation wave earlier, and LatAm is definitely a case in point where central banks are now hiking quite rapidly. Mexico has not started cutting yet, but there is a Banxico meeting this week. So we'll see.

Alexis de Mones: Are there some sectors you want to highlight as being transformative for the region? I know that in your recent travels, you spotted some changes. 

Gustavo Medeiros: During the holidays in my hometown in Brazil, I came across a lot of developments in renewable energy. Solar panels imported from China have resulted in a solar farm boom across many locations in the country.

Alexis de Mones: But is it still a pretty place to go on vacations though? Okay.

Gustavo Medeiros: You have got to go to the countryside, it is not right in front of you on the beach, don't worry. I also heard that's the case in Chile, so we're gathering some data around that.

We think that this massive boom in scale, and the lower cost of solar panels and wind turbines coming from China in particular, is helping those countries that are quite agnostic on where these technologies are coming from. And importing these technologies very cheaply, and getting scale is leading to a lower cost of energy. I've seen advertisements of companies saying you can pay 40-50% less than you're paying for the grid if you buy directly from an independent energy producer using renewable sources, which is a positive environmental, social and governance (ESG) point too. 

We're doing some research on solar panels and most likely will come out with something in February, but there's a whole new engine of growth potential coming out as a result.

Alexis de Mones: So, green energy, cheap grid energy, and in parts of the region, you also have more fossil fuel production, so on the other end of the ESG spectrum.

Gustavo Medeiros: An energy barbell! I mean, everybody can see from the OPEC, the EIA (Environmental Investigation Agency) numbers, that a lot of non-OPEC oil production growth in the next couple of years will come from Brazil, Guyana, and Argentina. It's going to be transformational for these three countries. Guyana is the biggest, or one of the biggest, in terms of transformation

Alexis de Mones: And Venezuela is attracting investment in oil and gas as well.

Gustavo Medeiros: What was the oil production of Venezuela peak, and what is today?

Alexis de Mones: It was three million barrels per day at the peak and got down to about maybe a tenth of that, 400,000 a day. It’s now back to 800,000 barrels per day already.

These are certainly some of the sectors worth highlighting in terms of investment opportunities. Where do you see the biggest opportunities from an asset class point of view, and some of the markets where you see that playing out?

Gustavo Medeiros: It's an interesting one when you think about how to play it. We love LatAm local rates because we are in this phase of the cycle where we don't know exactly when the US Federal Reserve (Fed) will start cutting rates or exactly what the Fed will do. You know, there's a lot of people saying, "Oh, the Fed's going to start in March" and then "No, it's not going to start in March anymore", and that's causing a lot of volatility. 

Whereas Latin America has already started. Chile is cutting in chunks of a hundred basis points, Brazil is cutting in chunks of 50, Colombia has started and Peru is well advanced as well. As you mentioned, I think Mexico is likely to start, if not at the next meeting, the following one at least, in our view. So Latin America's already easing because their real interest rates are basically the most elevated in the world. Not only is it the most elevated in the world, but it's very elevated within the typical Latin American cycle with real interest rates across Latin America close to 3%.

Alexis de Mones: But the market is already pricing some of these cuts. So, how do we get comfort that more cuts are priced, at least in the curve or the forward space?

Gustavo Medeiros: Yes, I think the question, as one of our analysts put it, is that it's not about what the Fed will do, but is about what the Fed can do, right? And the Fed has a bit of a bazooka in its hands because policy rates at 5.25% to 5.50%, you can cut 200, 300 basis points. There’s a lot of room. But LatAm can do a lot more because we're talking about real interest rates in the top five countries some 200 basis points-plus on average above real interest rates in the US. So if an exogenous shock leads to lower growth, Latin America will use monetary policy. Those real yields depend on the country, but Mexico is close to 7%, Brazil is close to 5%, so, it's pretty elevated overall. 

Then, when looking to the equity markets, the valuations are very attractive. Despite the fact that LatAm equities started performing well in Q4 last year, we actually had a blockbuster quarter for LatAm returns if you look at the earnings yield versus the 10-year government bonds. It is at one of the cheapest levels since 2005 across the entire region except for Peru, despite the fact that 10-year government bonds are elevated.

So, if you like local rates, you'll love equities, because if local rates come down more than the market is pricing in, the equity market can rebound a lot.

Finally, these local currency bonds and equities are in local currency terms. So if we're right in our thesis that the dollar peaked in Q4 2022, a thesis that looks good so far, then, obviously EM, LatAm bonds can do well, particularly if we get more growth drivers. 

LatAm local markets have been performing quite well and we think that this likely to remain the case. Another interesting opportunity to pay attention to is in the credit market. It's notable that after many years, you have mostly downgrades in terms of the EM debt space.

Alexis de Mones: Yes, and smaller countries that feature in the sovereign external EM debt index are notable because they have a positive outlook, at least by one of the rating agencies. They're all benefiting from improving macro stories where you still have some good valuation opportunity at either the local or the external level of both. 

In Uruguay, for instance, Moody's has given it a Baa2 rating with a positive outlook, and that would obviously be another catalyst for strong performance. The monetary policy has been quite conservative, with a 9% monetary policy rate, an attractive local currency debt market, and not so much external debt. 

Dominican Republic is also attractive from both an external debt and a local currency debt point of view and a position held in our fund – we are overweight both and the Dominican Republic has a positive outlook from Moody's as well. Another country that's very topical and timely is Paraguay. It has just done a local currency-denominated bond issue this week that the market has received very well. It's already a market that's active in the external debt space, and it's a country where we could see the first investment grade rating as well from Moody's as they're on a positive outlook at Moody's. So these are a few markets that are worth considering and less talked about, and Costa Rica as well, where the macro story has been pretty solid for a while. 

Gustavo Medeiros: Very good. It's good to see positive outlooks across the LatAm region.

Alexis de Mones: It's not all about Brazil; there’s a little bit more than that in LatAm at the moment. 

Gustavo Medeiros: We just wrote a piece on Argentina, where we basically laid out a three-act reform path for Milei to implement his dream of making Argentina a beacon of libertarianism again. 

We think that there's a lot of confusion around Middle East policies and the path because there are so many aspects of that that have to be addressed. So we really thought about demystifying it and saying this would be the perfect path for Milei to minimise the risks, and if he follows this path, Argentina would be a completely different country in 12 to 24 months from now. 

The first reform is obviously getting rid of Argentina’s inefficiencies, its fixed markets and subsidies, the fixed exchange rate, the subsidies in the utility space, and the very regional labour market. So, it's a route where micro reforms can have a massive macro impact. 

At the same time, Milei can renegotiate Argentina’s debt with the bank. It has a very large stock of short-term debt that has been accumulated both in the central bank and the treasury. So as you know, he's devalued the currency already and proposed two pieces of legislation. One is an emergency act with more than 300 measures. And the second one, the Omnibus bill which you mentioned, has already been passed in parliament or Congress and now will be negotiated in the Senate, which tackles many of those, including privatisations, for example. 

Now the second act, which I think is going to be very important, is that after most of these measures are passed and approved and institutionalised, and have lower risk of challenges by Congress and the Supreme Court, Milei needs a monetary stabilisation plan where the central bank hikes policy rates to positive levels and the currency suffers one last devaluation – and then perhaps pegging the currency momentarily in order to stabilise inflation. If he manages to do this one step-by-step, most likely, it's going to come at the same time that Argentina’s exports are booming. The soft commodity space was very poor last year because of a bad harvest and bad season, but this year’s harvest looks very promising. But we could also see some foreign direct investment and more local investment coming back. So this massive inflow of dollars will allow for a much better central bank position, and it will be able to stabilise the monetary policy and deliver monetary stability. 

Then, finally, once that's done, and obviously, the fiscal accounts have to be, at the very least, in a primary surplus by the end of this year. 

Alexis de Mones: That's certainly one of the first steps actually, yes.

Gustavo Medeiros: A 5% of GDP fiscal adjustment is what he's trying to do, so it's pretty massive. Then, finally, he can dollarise if he wants, depending on how many dollars come in. We argue that it's not necessary or actually perhaps not even welcome, but it seems like an option he has on the table. 

We debate the merits and the problems with dollarisation in the piece. We ultimately think he is going to be pushing for dollarisation and if he is successful in this path, I think that his popularity is going to be very different next year. By the third quarter of next year, mid-term elections mean he can actually increase his participation in Congress, if he's successful. So that's the perfect path. Of course, it's going to be very volatile and complicated, but it’s a very interesting reform story. If it happens, it happens once in a hundred years, so it's an interesting one to monitor.

Alexis de Mones: Very good indeed. A fascinating policy experiment and example of Latin American shock therapy. Let's hope we can capitalise on that in terms of investment opportunities in equities and local markets. Thank you, Gus. With that, Stephen, I will hand control of the proceedings back to you if you have any questions.

Stephen Rudman: Alexis and Gustavo. Thank you. You did the trick, because the couple of questions we had were around Argentina, so you just addressed them. So I think we’ve covered it. Just to let everybody know the Emerging View piece Gustavo just mentioned will automatically be sent to everyone who registered for the webinar. It is also on the Ashmore website. 

Gentlemen, thank you both for your time, very much appreciated. Opportunity certainly abounds, and as you have described, the inherently active nature of investment management bodes well in a place like LatAm, where it is not a singular entity. 

We will send a replay in the next 24 to 48 hours. Feel free to share that with your colleagues and comrades as you see fit. Moreover, if you have any further questions, don't hesitate to contact your Ashmore representative. Again, wishing everybody a great 2024, whether it's LatAm-based or the rest of the world. All the best.