The asset class stands to benefit from benchmark rates that are higher – and inflation rates that in some cases are lower – than in the US. In Latin America, central banks acted quicker than the Federal Reserve when price pressures started bubbling up, ultimately tightening more.
Now, with the Fed expected to cease raising rates soon and pivot to easing later in the year, the US dollar is sliding, paving the way for central bankers in the region to follow suit. That sets up a potential windfall for investors holding local-currency bonds.
“A structural allocation to local markets is one of the best ways to express your view in Latin America as the dollar weakens,” said Mauro Favini, a senior portfolio manager at Vanguard Group who helps oversee the firm’s $2.5 billion Emerging Markets Bond Fund.
“Once the Fed starts cutting, it allows Latin American central banks to follow as there is less risk of local-currency depreciation as the dollar falls,” he added. “There is much more scope for capital appreciation in Latin American bonds than the US.”
Consumer prices have started to fall significantly across emerging markets in recent months, with March data showing annual inflation hitting a 13-month low of 6%, compared to 6.9% in February, according to a provisional estimate from Capital Economics.
For some of Latin America’s largest countries, cooling inflation is the result of decisions to move early and aggressively to raise rates.
