Latam Equities Supported By Trending Commodities and FX Appreciation

• The significant deceleration in the Chinese economic activity, strong momentum on the USD amid elevated uncertainty and more recently the deterioration in the Russia/Ukraine conflict have been weighing on EM equities in the past year.
• EM equities are down nearly 25% since their high reached in February 2021, erasing 50% of their post-Covid gains.
• The top chart shows the significant divergence between EM equities and raw industrial commodities in the past year after co-moving strongly in the past 30 years.
• As many emerging markets are relying on commodity exports, periods of rising commodity prices have generally been associated with trending EM equities.
• However, par of the downtrend in EM equities has been driven by the fall in Chinese stocks, which account for 30 percent of the MSCI EM index.
• The bottom chart shows that Latam equities have experienced a sharp rebound since the start of the year, driven by the strong appetite for Latam FX and domestic risky assets.
• Latam FX have been gradually converging back towards their 'fundamental' value, mainly supported by the elevated nominal yields and aggressive tightening cycle run by central banks.
• In addition, Latam FX have also historically been strongly sensitive to oil prices, especially ‘major’ oil producers such as Brazil, Mexico and Colombia.

Source: Bloomberg/MNI