This year, Latin America has been the loudest music in the stock market disco. As Exhibit 1 shows, the S&P Latin America BMI (up 24.7%YTD) has outperformed other regions for most of the year.

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Notably, the S&P Latin America BMI is bouncing back from being the worst-performing region last year, when it closed down 24.4%. As Exhibit 2 shows, since 2019, the region has had periods of both significant outperformance and underperformance.

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As of the end of July, all constituent countries of the S&P Latin America BMI were up more than 20% YTD, with Colombia leading at 46.5% (see Exhibit 3).Brazil and Mexico with the largest weights in the S&P Latin America BMI, contributed 13.2% and 7.7% to the overall index return, respectively.

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The best-performing sectors in the region YTD were Information Technology, Consumer Discretionary and Communication Services (see Exhibit 4). However, the Financials sector, which has a weight of 32.0% on the index, was the major contributor to the S&P Latin America BMI’s performance. Brazilian banks were the main supporters of this increase, as they benefited from growth in earnings (e.g., Itau, Nu Bank) and positive economic surprises.

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Tariff negotations have been one of the major developments driving market performance, but the region is considered to be insulated from trade tensions. As illustrated by Exhibit 5, most Latin American countries have a trade deficit with the U.S., thus, haven’t been a target of high increases in tariffs. While Mexico is one of the few Latin American countries that has more exports than imports to the U.S., the USMCA trade agreement helps to maintain a stable trade relationship in the short term.

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On top of that, the valuation of Latin American equities is below its 10-year average price-to-earnings (P/E) ratio (see Exhibit 6). Additionally, based on the P/E ratio, equities from this region can be considered to be priced at a discount compared to those from other regions.

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Despite the strong performance this year, it’s important to consider that Latin America equities have historically tended to be more volatile than others, as seen in the past 1-, 3-, 5- and 10-year periods (see Exhibit 7).

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Relative low valuations and stability amid global trade tensions have brought attention to Latin American equities, but it is also worth acknowledging the volatility associated with these emerging markets. Latin music may sound good for dancing, but don’t fall on the dancefloor!

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