Latin American stocks have performed poorly for the past decade, relative to Global Emerging Markets and even more so compared to the S&P500. The explanation for this sustained period of poor results is threefold:
- The global economy has been characterized by enormous technological disruption which is undermining the value of many of the industrial and commercial models of the post W.W. II period. At the same time, demographics and rising debt levels have reduced growth and driven interest rates to historically low levels. These low rates have dramatically favored the valuations of the disruptive tech companies with long-term growth profiles. Unfortunately, the Latin American stock indexes have very few tech companies but rather are very heavily weighted towards the industries which are being disrupted by newcomers. In this regard, Latin American stocks are similar to the “value” segment of the U.S. market which has also had a decade of weak relative performance.
- Measured in U.S. dollars, earnings growth for Latin American publicly trade companies has been negative for the past decade (chart 1). This is because of low GDP growth and technological disruption and also the result of an extensive period of currency weakness (chart 2).
- Valuations for Latin American stocks have plummeted (chart 3). As in the case of currencies, public companies were very highly priced 10 years ago. The region was enjoying ample liquidity induced by the commodity super cycle and investors priced in a bountiful future.
Chart 1
Chart 2
The Latin American stock indexes are dominated by financials (32%), materials (21%), consumer staples (14%), energy (13%), communication (6%) and industrials (4%). All of these sectors are full of legacy business models and traditional companies. Moreover, all of them, except for materials and consumer staples, are under pressure from new entrants empowered by digitalization and artificial intelligence. The technology-driven sectors (Information technology, internet, eCommerce and healthcare) which drive the S&P500 and the China’s stock market, are very poorly represented in Latin American stock indices.
Nevertheless, this may be changing. Venture capital is flowing into tech startups in Latin America and several of these companies have established success as public companies. Also, some legacy companies are successfully transforming themselves by adopting digital models and have seen their valuations enhanced. If we create an equally-weighted ad hoc index of Latin American tech stocks by adding up the stock market performance of all these companies we can see a strong trend developing (chart 4). Over the past three years, the MSCI Latin American stock index has lost 40% of its value while out Latin American tech index has appreciated by 232%.
The ad-hoc index is made up of eight companies; two from Argentina (Mercado Libre and Globant) and six from Brazil (Via Varejo, Locaweb, B2W, Magazine Luiza, Pagseguro and Stone.) The group is dominated by four eCommerce players (Mercado Libre, B2W, Via Varejo, and Magazine Luiza) who are all active in the highly competitive Brazilian online marketplace space. A second group is active in the fintech payments space (Pagseguro and Stone.) Finally, two companies provide software services : Locaweb is involved in web-hosting and cloud services.; Globant develops software solutions.