Despite the global slowdown, favorable domestic conditions have supported the growth of Latin America’s most open economies, such as Peru, Chile and Mexico, and forecasts suggest strong capital inflows for 2013 which will fuel credit growth, according to Societe Generale.
In its first investment outlook, the French bank said Brazil is the region’s key outlier, with sluggish growth despite massive policy easing, both fiscal and monetary.
“In fact, it may be the only country in the region where 2013 GDP growth will exceed 2012, helped by statistical carry-over. Peru and Colombia could also perform well,” economists at the bank said.
Investment prospects remain uncertain, however, given strong government intervention in the private sector. Mexico remains SG’s standout favorite, given the successful shift to domestic demand drivers and prospects for structural reforms.
Meanwhile, as year end approaches, investors are keen on taking profits and cleaning their books.
“While abundant central bank liquidity and glimmers of a silver lining in the macro outlook can be seen as risk on factors, window dressing and lingering political uncertainty will continue to compel investors to keep a relatively cautious stance in the short term as political uncertainty weighs on market sentiment,” the bank said.
However, brace for a risky asset rally in early 2013 with a re-rating of massively undervalued asset classes, Societe Generale warned.
Investment opportunities are to be found both in credit and in equities as investors are eagerly looking for alternatives to cash and may turn more bullish on the back of the improvement in the macro outlook and receding political risks.
In spite of dispelled systemic risks, investors remain shy about investing in equities as attractive valuations are offset by elevated uncertainty surrounding the course of fiscal policies and low growth prospects in developed economies.
“Our biggest call for equities is on emergin markets. Below average valuations, potential for additional policy easing and sustained growth make these markets compelling,” the bank said.
The biggest catalyst for a broad-based improvement in EM equity performance is the growth turnaround in China already reflected by the bottoming out of leading indicators.
Societe Generale added that capital inflows to emerging markets have so far mainly benefited fixed income markets and are likely to partially reallocate in favor of equities.