Citi Global Wealth reGioNAL ASSeT CLASS PreviewS | | 96 Investments The Brazil MSCI Index had a volatile but solid ahead of the 2024 elections, leading to capital impact from almost 400bps of Federal Reserve performance in 2022, gaining 9%. Of the large, outflows and currency weakness, the latter rate hikes. more accessible equity markets in the region, impacting equity returns in US dollars. it stands out again in 2023. By nature, a highly Not all countries or large issuers performed as volatile market, Brazilian valuations remain quite Our favored regional sectors are healthcare and well, however. Mexico’s state-owned oil company attractive. And despite fiscal policy uncertainty, consumer discretionary, energy and materials. PEMEX, for example, was unable to reduce its fundamental dynamics look fairly solid. These sectors should benefit from easier debt burden despite a very strong oil market. monetary policy and still robust external and Its 10-year credit default spread widened from While more concentrated than Brazil’s well- commodity sectors. 400bps to 760bps. Colombia elected a left- diversified economy, the MSCI Brazil Index leaning president whose initial platform included offers potential opportunities for global Fixed income eliminating crude oil exports. Given oil is one of portfolios to participate in agriculture, energy, Colombia’s primary exports, the country’s US financial, retail and materials. The large-cap dollar credit spreads also widened considerably, companies that dominate the index offer sizable Latin American US dollar–denominated fixed from 273bps to 425bps. revenue streams, improved balance sheets and income fared poorly in 2022, like bonds profitability, and generous dividend payout globally. However, for the two large bellwethers Throughout Latin America sovereign and policies. Despite their cyclical bent, forward in the region of Brazil and Mexico, poor total corporate bonds, there is a large disparity in price/earnings multiples of around seven return performance due to rising yields was credit performance. We think this will persist, compensate for this. Notwithstanding high almost entirely attributable to dollar rates so investors should consider the region a “bond expected volatility, Brazil could again prove an moving higher. picker’s” market. The region is reasonably well attractive play in 2023 as China reopens and the protected against a stronger dollar owing to its US economic cycle bottoms out. The credit risk of those two countries – as status as a commodity-exporting powerhouse, measured by credit spreads – did not increase along with its strong intermediate goods export The MSCI Mexico Index is up 108% from its much. Brazil 10-year credit spreads had risen sectors as well, both of which draw dollars into 2020 lows, compared with 82% and 67% for only marginally from 291bps to 352bps in the region. the S&P 500 and MSCI World respectively. the year to 23 November 2022. Likewise, the This is impressive both in absolute and relative Brazilian national oil company saw 10-year credit In addition, most countries’ central banks terms. While up nearly 2% year to date, Mexico spreads rise only about 70bps from 346bps to have acted speedily in raising rates to combat more importantly is down only 7% from its 413bps. Both Brazil and the national oil company inflation and stay ahead of the Fed’s hikes. This post-pandemic highs. That compares to a 20% are rated just below investment grade. So, has resulted in significant relative currency decline for the S&P. compared to US high yield index credit spreads strength against the dollar. which rose over 160bps from 280bps to 445bps, That said, commodity and other goods prices On around 11 times forward earnings, Mexico they clearly outperformed. trades below its historical average of around 13, may decline in 2023 if the US or Europe enter but above Brazil. We expect its strong economic Mexico – which has an investment-grade rating recession. Additionally, following Lula’s election ties to the US to hit profitability in 2023, – saw more credit spread deterioration, with in Brazil, all countries in Latin America are now although this is not yet visible in 2023 earnings 10-year credit default swaps (CDS) rising from run by left-leaning administrations, who may forecasts. Domestic confidence and investment 156bps to 229bps. Again, though, this was favor ramping up spending on social programs could also suffer from rising political uncertainty somewhat marginal when compared to the and tempering market-based outcomes in the