Investors remain constructive about EM and particularly LatAm, although global views vary widely, some are still licking their wounds from last year, and the latest US developments still induce some level of caution. Some (typically faster money) still expect a sharper global/US slowdown with an eventual precipitation of rate cuts, while others still fear tightness in the labour markets, sticky inflation and a prolonged period of high core rates. Variations of these scenarios coupled with contained volatility could remain supportive for LatAm overall and its high nominal and real yields and cheaper valuations. Indeed, LatAm FI and duration generally seem to be more consensus trades, so larger backups in global yields (with more QT, or US fiscal sustainability concerns) or smaller rate cuts by developed market central banks could be risks going forward.
LatAm policymakers were orderly – although cautious, as expected – but are still confident in the LatAm disinflation process. A continuation of easing could still feed the FI markets. Indeed, we believe more cuts than currently priced in could follow in most LatAm markets. As the cycle progresses, the strategy could well be for steeper curves, which could potentially impact FX. Investor views on FX vary more widely, but some share our concern about lower yields and ultimately more volatility eroding carry – at least for those that are heavily positioned.
We offer our first takeaways and thoughts in this note.