The outlook for Latin America remains challenging due to increased Covid-19 related debt (USD 34.8bn YTD) and significant structural reforms being debated by congresses across the region. Even as economies are slowly starting to rebound, the region faces high levels of contagion. Credicorp Capital Asset Management (CCAM) sees volatility and increasing opportunities ahead in the region.
Dario Valdizan Head of Buy Side Research at Credicorp Capital expects that, “China's fixed asset investment related growth will be supportive of an increasing demand for copper and iron ore, favoring countries like Chile and Peru. On the demand front, we see a more efficient deployment of government assistance in Brazil combined with a higher penetration of e-commerce as supportive backdrop to consumer staples.”
Furthermore, he stated that, “Although we expect sovereigns’ credit metrics to deteriorate, we do not foresee Latin America’s sovereign bonds losing their Investment Grade (IG) with the exceptions of Mexico and Colombia (which we expect to lose their IGs in the next 18 months).” On the Corporate debt front, he mentioned that Latin America corporations were well prepared for the crisis with low debt ratios and solid balance sheets. Latin America's Corporate spreads are more attractive compared to those of US or other Emerging Markets, even after the fast recovery from their peak reached in March at 880bps. CCAM prefers names in the consumer non-discretionary industry and the utilities sector for their resilience during this crisis.
When dealing with Covid-19, two distinct tactics emerged in Latin America. On one hand, the proactive, centralized government approach used by the Andean countries (Chile, Colombia and Peru) entailed drastic lockdowns and constant communications with regards to Covid-19 associated risks. On the other hand, Brazil and Mexico implemented decentralized approaches led by governors. This was possible due to their federal government structures. While Brazil implemented a robust fiscal and monetary response, Mexico’s response involved an expanded role of its Central Bank beyond that of “lender of last resort”. As both presidents minimized the possible dangers of the pandemic, neither country addressed the impending health consequences, which is reflected in the contagion and death levels.
As countries have started to reopen their economies, investors have turned their attention to measuring mobility indicators in an attempt to gauge the velocity of a potential recovery. Full economic recovery hinges on governments’ abilities to identify and reach those parts of their populations requiring assistance. Countries with mature digital, health, and government infrastructures are at a distinct advantage while those lacking in it are at risk of a permanent second wave until a vaccine is developed and distributed.
Credicorp Capital is part of Credicorp Ltd., the leading and largest financial holding company in Peru with more than 130 years of history, which is listed on the New York Stock Exchange (NYSE: BAP) and has a market capitalization of USD 20.12 billion *.Credicorp Capital is one of the subsidiaries of the holding Credicorp Ltd., which groups together BCP, Prima, Pacífico, Mibanco, Krealo and Credicorp Capital. It is also a holding company dedicated to providing financial services that arose from the consolidation of three leading Latin American corporations in Colombia, Chile and Peru. Additionally, it is a regional platform dedicated to providing financial advisory services. Today, it has a presence in 5 countries, Colombia, Chile, Peru, USA and United Kingdom, more than 1,500 employees and USD 30.7 billion ** of Assets Under Advisory/Management.
* Source: Credicorp / Information at the end of 2019, considering an exchange rate of USD 3.34
** Source: Credicorp Capital / Information at the end of 2019 (includes assets under custody managed by the Wealth Management team)