BNY’s Head of Markets Macro Strategy Bob Savage highlights that Latin American assets have seen strong, broad-based inflows across equities, bonds and FX, leaving positioning elevated versus other Emerging Markets. The bank warns this is hard to justify without major reforms or lasting commodity gains and expects some adjustment, already starting in FX, as Latin America cannot decouple from developed markets and APAC.

Flows, carry and correction risks

"Our data show that Latin American assets have recorded indiscriminate inflows over the past few months. This is not sustainable and sets the region up for a material correction."

"As of Monday, every single Latin American equity market for which we have sufficient data density was being net bought – strongly so in the cases of Brazil and Peru. In fixed income (sovereign and corporate combined), every bond market except for Peru has been net bought on a quarterly basis, also with high flow scores. The net result is that most markets are now strongly held across all asset classes, which is difficult to justify unless material structural reform is taking place along with expectations of sustained gains in commodity prices."

"In FX, Latin American holdings have surged over the past two months while other emerging markets have struggled, even with gains in many widely traded APAC funders. As highlighted yesterday, some of the gains could be attributable to the unwinding of underlying assets, but as this is not taking place in Latin America, the gains are mostly related to carry interest. There are early signs of the complex peaking but Latin American currencies are certainly not taking the lead in the process."

"Latin American equity holdings are tracking EM equivalents, but the gap in fixed income has widened significantly, led by sovereign bond divergence. The initial phase in this trend took place in November, when Latin American sovereign holdings jumped to around 15% above the rolling 12-month average, while EM fell below the benchmark. As of early February, global EM holdings remain below the benchmark, while Latin American fixed income is around 10% higher, led by gains in key markets. Given that Latin America cannot feasibly grow independently of developed markets and APAC, some adjustment is likely needed. This is indeed materializing in FX first, probably due to expectations of further easing ahead."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)