LatAm in focus: 2021 H2 market outlook

MarketPulse takes a look at what could be in store for three key geographies in Latin America.

Colombia
The outlook for Colombia is optimistic despite its second sovereign rating cut to junk, since the Delta variant jitters will abate as the economic recovery accelerates and protests and lockdown measures ease. Colombia still holds investment-grade status with Moody’s, and as long as it can keep that up, foreign investors will remain upbeat with Colombian assets. Foreign investment into Colombian debt was strong in the second quarter, and that should improve as the economic recovery improves.

The government and central bank are providing ample opportunity that does not seem like it will be changing anytime soon. Unlike most of its peers, inflation is still not a worry. The Colombian central bank has anchored CPI expectations as the current rise seems tolerable until the first quarter. The Colcap Index is likely to finish the year above the 1,300 level, possibly testing 1,350 early in the first quarter. The Colombian peso is poised to have a strong second half rallying towards 3750.

Brazil
A weaker Brazilian real has done wonders in spurring domestic tourism. Currency traders continue to expect volatility with the Brazilian real. The 5.31 level for the real is a key level that saw the Brazilian central bank intervene against further currency weakness.

Brazil, one of the worst COVID-hit countries, is starting to see the pandemic slow, and expectations are growing that activity will soon start to normalize. Electricity demand is back above pre-COVID levels, and unemployment insurance requests are back to levels seen two years ago. Given a lacklustre vaccine rollout, investors really need to feel confident that Brazil will not see another major wave of COVID. The Brazilian real should finish the year stronger and closer to the 5.00 level. If COVID is in the rearview mirror, the real could rally to 4.80.

The Ibovespa Index has already outperformed and could push slightly further into record territory but will likely remain rangebound between 120,000 and 130,000 over the next 12 months.

Mexico
Mexico is still battling a third COVID wave, but optimism remains that they will finish vaccinating adults at the border in early August. Mexico’s outlook is clouded by uncertainty over mounting tensions with the US regarding the USMCA. Mexico’s economy will receive a much-needed boost once restrictions are eased with the US border. The second half recovery might not be as robust as hoped. Tight fiscal policy and lasting damage to the labour market will lead to a slow recovery.

The Mexican central bank has an inflation problem, which will lead to a string of rate hikes during the second half of the year. The peso should overall rally during the second half of the year towards the 19.00 level.

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