SPECIAL REPORT

ECONOMIC RESEARCH
January 19, 2015 - N6
Nordine Naam, Juan Carlos Rodado, Yuze Yuan

LatAm: investment opportunities for 2015

As indicated in our LatAm 2015 scenario (Latin America: Review and Outlook), LatAm growth will remain
poor in 2015 due to low commodity prices, US monetary policy tightening and structural weaknesses in some
countries of the region. However, this does not mean the region lacks investment opportunities in 2015. We
like Mexicos manufacturing sector, Colombias infrastructure story, Chiles consumer sector and carry in
Brazil. But keep in mind that LatAm currencies should weaken in 2015 and financing costs will increase with
the Fed starting to tighten in June 2015.

1/ Mexicos manufacturing sector

Mexicos booming manufacturing sector, with the
export oriented car industry in particular, will
benefit from the rising US demand for cars. Lower
gasoline prices act like a tax cut for American
consumers. US regular conventional retail gasoline
prices (USD 2.14 per gallon on Jan 5) is down by more
than a third from August (at around USD 3.4) in
tandem with the freefall of oil prices. Auto sales in the
US are booming because consumer credit has started
a new cycle.

90

Chart 1
Mexico: manufacturing exports and exports to US
(% of total exports)
Manufacturing exports
Exports to US

88

90
88

86

86

84

84

82

82

80

80

78

78

Audi). The auto boom should also boost related

activities (auto parts, electric equipment, steel
industry). All in all, consumption and growth will
remain robust in the US in 2015 while the recent
depreciation
of
the
MXN
reinforces
the
competitiveness of Mexican products. The auto
boom has just begun.
2/ Colombias infrastructure sector
Though weak oil prices will keep taking their toll on
Colombian economy, the country will benefit from
its massive infrastructure program the famous 4G
(47 Bns COP). The program will cover road upgrading,
4-lane highway concessions as well as the construction
of tunnels and bridges. In this context, infrastructurerelated securities which have suffered from falling oil
prices look cheap if oil prices rebound in Q2.
Even if the transmission process from infrastructure is
generally slow, the economy will surely be boosted by
the ambitious plan (Chart 2). Real estate prices will
keep rising with the infrastructure upgrade. We
expect the infrastructure boom to fully kick in next year.
Chart 2
Colombia: GDP and its construction component
(Y/Y, %)

10

Sources : Datastream

76

76
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

25

GDP
GDP construction component - RHS

20

8
15

Manufacturing exports represent 83% of total exports

in Mexico and 79% of the countrys total exports are
directed to the US market (Chart 1). As a result,
Mexicos export-driven manufacturing production is
increasing notably automotive exports. The country
has surpassed Brazil as the leading auto producer
in LatAm in 2014 and is the fourth largest
automobile exporter in the world. Mexico has been
rapidly scaling up in the value chain including new
factories of luxury brands (Mercedes Benz, BMW,

10
5

0
2
-5
Sources : Datastream

-10
05

06

07

08

09

10

11

12

13

14

15

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3/ The dollar and oil trade

14

Robust US growth, Fed tightening and lower oil

prices should weigh on LatAm currencies in 2015.
Long dollar is our call. COP and MXN have been
among the biggest victims in the recent LatAm
currency sell-off since late November. We see
USD/MXN and USD/COP above 15.0 and 2500 in the
short term respectively. The oil counter shock will hit
both countries through the fiscal, investment and trade
(Mexico to a lesser extent) channels.
However, given the freefall of oil prices (WTI at USD
43 per barrel in Q1), there are some short-term
buying opportunities for COP and MXN if there is a
technical bounce in oil prices. In that case the two
currencies could rally given their high correlations with
oil recently (Chart 3). However, the opportunity would
be short-lived with the Fed tightening in H2.

1.0

Chart 3
Mexico and Colombia: 30 day rolling correlation of
weekly returns on currencies and Brent

0.8

1.0
0.8

COP
MXN

0.6

0.6

0.4

0.4

0.2

0.2

0.0

0.0

-0.2

-0.2

-0.4

-0.4
Sources : Bloomberg

-0.6
Jan-14 Mar-14 May-14 Jul-14

Chart 4
Brazil: Selic, IPCA and Pre-DI (%)

-0.6
Sep-14 Nov-14 Jan-15

14

Selic
IPCA (Y/Y)
Pre-DI 5y

12

12

10

10

4
Sources : Datastream

2
10

11

12

13

14

15

5/ Chiles consumer sector

Lower oil prices benefit the consumer sector by
bringing down inflation and increasing households
purchasing power. To Chile it is more than welcomed
given its high inflation (4.6% Y/Y in December) and
currently low dynamism in consumption (Chart 5).
Lower energy prices may even prompt BCCh to
resume its easing cycle, further stimulating
consumption.
Chile is a net oil importer, so lower inflation is not the
only transmission mechanism. Better terms of trade
(though copper prices remain weak) will lead to higher
net exports and improving current account balance.
CLP should thus suffer less than its LatAm peers. The
overall positive impact to the economy will
enhance consumer confidence and therefore drive
consumption. Notice that playing this trade requires
patience since inflation remains high. The main
downside risk is lower copper prices.

4/ Brazil: locals take the carry

Local bonds seem interesting given the carry in
Brazil. BCB preemptively hiked the interest rate by
25bps in October followed by a 50bps hike in
December (Chart 4). We expect the central bank to
continue its hiking cycle in January and March, putting
Selic target at 12.50%. The real rate could reach 6.0%
by then. Carry is definitely an interesting long-term
opportunity in Brazil as we do not see the country
defaulting even if its credit quality is under
pressure.
But keep in mind it is interesting only for domestic
investors, given that the BRL should depreciate.
The currency has strengthened recently due to the
announcement of the new economic team, but it is set
to weaken given worsening terms of trade, stagflation,
and the US monetary tightening.

Chart 5
Chile: inflation and consumer confidence
6

150

Inflation
Consumer confidence - RHS

140

130

120

110

100
Sources : Datastream

90
11

12

13

14

15

6/ Long end under pressure with Fed tightening

Higher yields in the US are going to put pressure
on the long ends of LatAm yields in both USD and
local currencies. Fed tightening will be one of the
main market movers in 2015. Keep in mind that the US
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has been a major liquidity provider for LatAm given the

share of LatAm bonds held by US residents.
Historically there has been a significantly positive
relationship between the term premiums (the difference
of 10Y or 5Y and 3M) of LatAm interest rates and US
10Y yield (Chart 6). Term premiums in Brazil,
Mexico and Colombia have been largely following
US 10Y yield especially since late 2012. The only
exception is Chile, which is considered as the regions
safe haven. We expect a gradual rise in 10Y yield
reaching 2.70 at the end of 2015. This should weigh
on the long end of LatAm yield curves. The private
sector will certainly suffer from higher financing costs.
Chart 6
LatAm: term premiums and US 10y

manufacturing sector, Colombias infrastructure

story, Chiles consumer sector and carry in Brazil.
But keep in mind that LatAm currencies should
weaken in 2015 and financing costs will increase
with the Fed starting to tighten in June 2015.

Brazil (Pre-DI 5Y-3M)

Chile (CLP*Cam 10Y-3M)

Colombia (COP*USD 10Y-3M)

Mexico (TIIE 10Y-3M)

US 10Y

0
Sources : Bloomberg

-1

-1
10

11

12

13

14

15

Bottom line: even if the region is facing a tough year,

there
are
nevertheless
several
investment
opportunities in LatAm. We
like
Mexicos

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