Can Latin American Equities Continue Outperforming?

Yes. We believe Latin America (LatAm) will benefit from today’s shifting market dynamics, supporting its outperformance over broader emerging markets (EM) stocks. LatAm equity and currency valuations are deeply discounted and the region is relatively insulated from trade and geopolitical tensions—especially compared to Asia. We recommend investors adopt a modest overweight to LatAm equities, funded from broader EM allocations.

LatAm has performed strongly in 2025, returning 25.0% year-to-date in US dollar terms, compared to 18.4% for EM. Two main drivers underpin this outperformance. First, most LatAm countries run trade deficits or modest surpluses with the United States. As a result, they were less affected by the reciprocal tariff policy unveiled in April. In contrast, Asian countries with large trade surpluses have faced more scrutiny from the Trump administration. Second, LatAm markets are rebounding from steep declines in 2024, when a stronger US dollar and political risks dampened investor appetite. Notably, currency depreciation accounted for roughly two-thirds of last year’s decline in US dollar terms.

Beyond recent returns, other factors also support LatAm’s outlook. LatAm equities trade at a 50% valuation discount to other EM stocks—one of the lowest levels on record. Historically, lower relative valuations have often led to stronger subsequent performance, even over shorter time horizons. LatAm currencies are also cheap, with real exchange rates versus the US dollar roughly 15% below their trailing 20-year median. While equity market momentum has improved this year, further upside potential remains: LatAm outperformed EM by an average of more than 70% cumulative during prior upside cycles, which typically lasted around 2.5 years.

The current policy and geopolitical environment should continue to favor LatAm. US tariff policy poses a significant headwind for Asia, where elevated valuations and earnings growth expectations do not reflect the risk of slowing trade volumes. Global investors appear underweight LatAm, where attractive valuations are likely to garner incremental fund flows as the US exceptionalism narrative fades. Additionally, a softer US dollar, escalating geopolitical tensions, and structural themes—including the energy transition and the buildout of artificial intelligence capabilities globally—suggest potential for sustainably higher commodity prices. Combined with the potential inflationary impact of tariffs, these factors would support LatAm outperformance, as periods of rising commodity prices and inflation have historically benefited the region at the expense of net commodity importers in Asia.

US proposals to impose 50% tariffs on copper and Brazilian imports are likely to prove more bark than bite. Brazilian exports to the United States represent just 2% of GDP, a far cry from Asia’s exposure, while Brazil’s deepening trade ties with other partners are likely to accelerate and help mitigate the impact. Chile, Mexico, and Peru—which are among the world’s top copper producers—supply around 70% of US copper imports, where roughly half of annual copper consumption in the United States is imported. As copper demand tends to be inelastic in the short term, this has raised speculation that LatAm producers could receive a reduced tariff rate, exemptions, or implementation delays, similar to other sector-specific tariff actions. Finally, listed equities in LatAm derive only 10% of revenues from the United States, versus roughly 70% from within the region.

LatAm currencies have the potential to add additional value. LatAm interest rates are elevated relative to major EM peers, placing a floor under any depreciation potential, and leading indicators suggest inflation is set to cool in LatAm in the coming months. While Asian currencies are similarly valued against the US dollar, their upside may prove more limited. Significant appreciation would erode export competitiveness, which is economically more significant for Asia. Additionally, various sectors in the region, such as Taiwanese life insurers, are currently sitting on large losses in foreign bond holdings, and further currency appreciation would exacerbate these strains.

While the outlook is positive, risks in LatAm remain. They include political uncertainty with major elections in 2026, fiscal pressures from budget deficits, and an underweight to technology stocks. However, we believe these risks are reflected in prices presently, with valuations offering a compelling margin of safety. Given our preference for a disciplined approach to risk, the sizing of an overweight should remain modest, but we see strong potential for continued outperformance in LatAm.