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Morgan Stanley Believe Latin America Could Be EM Weak Link

LATAM
  • Latin America is most vulnerable EM region to renewed US dollar optimism and a shift in risk sentiment.
  • Strategists noted, "Low carry, weak fiscal positions along with poor productivity trends make LatAm the weak link in EM".
  • Carry adjusted vol for the region is close to the lowest level of the past decade on a relative basis. Additionally, fundamentals have deteriorated faster than its EM peers after the end of the commodity supercycle.
  • The region lacks investment and competitive advantages in sectors that produce secular growth.
  • An additional negative factor for Mexico and Brazil is the lack of focus on green investment.
  • A heavy political calendar for 2021 with presidential elections in Chile and Peru, and mid-term elections in Mexico should also keep uncertainty elevated.
  • Trades to consider given this backdrop include buying USD/COP and paying 7-year IBRs; long CADMXN; and engaging in Brazil 3-month 1-year vol steepeners.

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