MS Latin America's Unfinished Business

Sunday Start | What's Next in Global Macro | Latin Morgan Stanley & Co. LLC Idea

Simon Waever America Strategist

Latin America's Unfinished Morgan Stanley C.T.V.M. S.A.+

Fernando D Sedano Chief LatAm Ex-Brazil Economist

Morgan Stanley México, Casa de Bolsa, S.A. de C.V.+

Nikolaj Lippmann Equity Strategist

Halfway through the year, Latin America has delivered enough to keep the bull case we outlined in January alive, but not enough to ensure it. The region has outperformed most other emerging markets, and several encouraging policy shifts have materialized over the past year. External conditions and second quarter earnings will influence how far and how quickly markets can move in the near term, but in our view the next leg of upside will depend mainly on whether governments can deliver credible fiscal and structural reform. Across the region’s asset classes, we still think investors are being paid to position for a favorable outcome, but country and instrument selection matter.

The main near-term headwind is external rather than domestic. Competition for capital remains intense, and with the Fed on hold and the dollar still firm, investors have been reluctant to chase EM carry and value, however attractive Latin America may look. We would offer two counterweights. First, we do not think this backdrop will last indefinitely. Our US economists expect the Fed backdrop to become more supportive over time, removing one of the main obstacles to a broader rotation of capital into the region and to further monetary easing in some economies. Second, even if external conditions worsen before they improve, we believe Latin America is better placed to absorb the pressure than in previous cycles. Central banks have built well-earned policy credibility, while external balance sheets are more resilient too. Even if the Fed raises rates this year, our LatAm economists expect that only Peru will need to follow.

Domestic policy will determine the scale of the medium-term upside. The policy direction over the past year has been encouraging, opening the door to more market-friendly policies and, in several cases, closer alignment with the US. The change in Venezuela is the clearest example, creating an opening for economic normalization and renewed investment. Brazil’s election in October is the next major test of whether that pattern extends to the region’s largest economy. For now, the polls remain relatively close. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, Markets, however, need more than a change in direction. Monetary discipline has investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley largely been achieved, but fiscal consolidation is still lagging across much of the Research. Investors should consider Morgan Stanley region and remains the main constraint on further progress. Argentina has shown Research as only a single factor in making their investment decision. what is possible once fiscal adjustment takes hold. Colombia, Chile, and Ecuador are For analyst certification and other important disclosures, best placed to follow, we think, while similar progress in Mexico or Brazil would be a refer to the Disclosure Section, located at the end of this report. bigger surprise. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member Stronger fiscal policy, particularly when paired with broader structural reform, and may not be subject to FINRA restrictions on would create room for deeper rate-cutting cycles, with investment and growth communications with a subject company, public appearances and trading securities held by a research analyst account.

following in time. In our view, the current weakness across several economies is therefore less a standalone growth problem than a consequence of this sequencing.

We hear three common pushbacks that deserve attention. The first is that Latin America lacks a seat at the AI table, with no frontier labs, few hyperscalers, and no obvious exposure to the theme dominating global markets. We think that misreads…