Latin America: A Bet on China's Rise
We don't know if and when Latin America will dismount the Chinese dragon, but risks are growing.
Latin American stocks are an indirect bet on China's infrastructure boom. Let me explain: China's mandarins pumped credit into China's economy during the financial crisis to ward off the effects of collapsing global demand. Latin America's commodity exporters have reaped the fruits of the resulting construction boom, tying the region's fortunes to China's fiscal and monetary policy via commodity prices. The correlations are telling. In the two decades before 2007, the S&P Latin America 40 Index's rolling three-year correlation to commodity prices, proxied by the Goldman Sachs Commodity Index, rarely rose above 0.30. Rolling correlations have since shot up to 0.80.
Granted, rising commodity prices have helped set off a virtuous cycle of credit expansion and asset appreciation, lending internal momentum to the region's growth. Despite it, Latin America hasn't decoupled from the West's woes. Witness how the region's equity markets have cratered during the eurozone crisis. If anything, Brazilian stocks behave like turbocharged exposure to world markets in part, thanks to a vibrant carry trade (in addition to the Chinese export link we mentioned). Even after recent cuts in Brazil's benchmark SELIC interest rate to under 10%, Brazilian bonds are among the highest yielding in the world. The high rates have attracted a lot of foreign capital from low-yielding markets, elevating the real to one of the priciest currencies on a purchasing-power parity basis. Dents to Brazil's economic outlook will hurt equities and spur further rate cuts, which in turn will hurt the real and wallop equities again.
Samuel Lee does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.