Citi Global Wealth reGioNAL ASSeT CLASS PreviewS | | 97 Investments corporate sector. Given this uncertainty around We expect the Brazilian real to range trade in policy mix within countries, we suggest investors 2023, capped by fiscal policy uncertainty but focus on sovereigns with stronger credit metrics. also supported by very high real rates. The For corporates, we suggest investors primarily Mexican peso could see depreciation pressure consider globally dominant companies and local as its economy and trade slow, while the political banks that finance them, with management who environment puts pressure on capital flows. have already exhibited balance sheet and capital allocation discipline. FiGUre 3. LATiN AMeriCA FiXeD iNCoMe YieLDS Currencies Chile 10y Sov (USD) 4.6 Most regional currencies had a solid 2022 Peru 10y Sov (USD) 5.2 thanks to strong trade flows and central bank Chile 6y Sov (local) 5.5 tightening. The exceptions to this were the Colombian and Chilean pesos, down 15% and Mexico 10Y Sov (USD) 5.6 4% against the US dollar respectively. These falls mostly resulted from domestic political and Brazil 10y Sov (USD) 6.0 structural reform uncertainty. Higher inflation Peru 4y Sov (local) that left real policy rates in slightly negative 6.8 territory was also a factor. But this is expected Colombia 10y Sov (USD) 7.2 to correct as 2023 inflation expectations are much lower. Latin America Agg (USD) 8.4 Broadly speaking, monetary policy in the region Mexico 5y Sov (local) 9.1 is likely to become less restrictive than in the developed world as nominal policy rates are Colombia 5y Sov (local) 12.8 now much higher than recent inflation. The Brazil 4y Sov (local) 13.8 challenge for central banks will be handling the inflationary risks from 2023’s looser fiscal 0 2 4 6 8 10 12 14 16 policy. As the US enters recession and markets look for Fed rate cuts, the US dollar could see a broad-based weakening. Latin American policy Source: Bloomberg Barclays, Bloomberg and The Yield Book, as of 23 Nov 2022. Past performance is no guarantee of future returns. Real results rates are likely to continue to provide attractive may vary. carry. Barring policy mistakes, the environment could be relatively benign.