Click here to view this message in a browser window.

15 December 2023

Outlook for Brazil and Mexico still supportive for equities in 2024

Following the outperformance of Latin American stocks in 2023, the outlook for next year looks more challenging. Slow economic growth and fiscal deficits will dominate the agenda again. In this Macro Flash Note, Economist Joaquin Thul looks at the outlook for Brazil and Mexico for 2024 and how despite some domestic challenges, it remains positive for equities in Latin America.

Equity markets had a strong performance year-to-date, with developed market stocks outperforming emerging market stocks by over 10%. Within emerging economies, performance has been mixed. While Chinese stocks are down by over 12% in 2023, equities in Brazil and Mexico are up by 15% and 12% respectively in local currencies YTD. They have both outperformed the MSCI Emerging Markets index this year (see Chart 1). In US dollar terms, stocks in Brazil and Mexico have outperformed the EM index by over 20%.

Chart 1. Outperformance of equities in Brazil and Mexico
(Total Return in local currencies YTD %)

Source: LSEG Data & Analytics and EFGAM calculations. Data as of 7 December 2023.

Looking into next year it is worth analysing the macroeconomic outlook for Latin America’s largest economies. After a year of better-than-anticipated economic performance, 2024 is expected to be characterised by slower GDP growth, monetary policy easing, stronger exports and challenges from fiscal side and climate events.

Brazil

There is anticipation that the global economy will avoid a deep recession next year. In line with that, Brazil is expected to avoid a sharp GDP contraction in 2024. Growth is expected to decline from 3% this year to just over 1.5% in 2024, attributed to a softening of domestic demand and reduced capacity for further fiscal expansion.¹ According to IMF estimates, China’s economy growth is expected to decelerate from 5% in 2023 to 4.2% in 2024. Therefore, better-than-expected growth in China, Brazil's main trading partner, and a soft-landing scenario in the US would support demand for Brazilian exports and contribute to GDP growth. However, volatility in commodity prices and the potential reemergence of inflationary pressures in food prices could create headwinds to activity.

The Central Bank of Brazil has already started easing monetary policy, delivering four 50bps rate cuts since August 2023. The Selic rate, currently at 11.75%, is expected to keep declining to 9%-9.5% by the end of next year. Inflation has fallen from a peak of 12% year-on-year in April 2022 to 4.68% in November 2023, helped by a decline in global goods prices and strong supply of agricultural products (see Chart 2).

However, the impact of El Niño on agricultural and fishing production in 2024 could be meaningful.² Agricultural output is already expected to be weaker than in 2023 and could exert a potential drag on GDP and inflation by raising food prices.

Chart 2. Central Bank of Brazil already cutting rates following progress to contain inflation

Source: LSEG Data & Analytics and EFGAM calculations. Data as of 14 December 2023.

Reducing the fiscal deficit will be trickier and slower than initially anticipated. The government of President Lula proposed a new fiscal framework with a fiscal deficit target of 0.5% of GDP in 2023 and close to 0% by 2024. This is unlikely to be met. A tax reform would improve the ease of doing business. However, it is still unclear whether there will be political agreement of any significant changes.

Mexico

According to IMF projections, Mexican GDP growth is expected to fall from just over 3% in 2023 to 2% in 2024. The strong performance of the US economy in 2023 partially explains the better-than-expected growth in Mexico this year. This has been mostly related to fixed investments, which has only recently recovered from a declining trend between 2019-2020 and had a strong impulse in 2023 (see Chart 3). Mexico will be a clear winner from ensuring supply chains for manufactured goods remain in place and not affected by political noise around the US election. If the US economy slows meaningfully in 2024, it could also expose some of the weaknesses in Mexico.

Chart 3. Mexico gross fixed capital formation
(% of GDP)

Source: LSEG Data & Analytics and EFGAM calculation. Data as of 7 December 2023.

Interest rates have been at a historical high of 11.25% since March 2023. Inflation has declined from a peak of 8.5% year-on-year in September 2022 to 4.3% in November 2023 but remains above the 3% target. The Bank of Mexico is expected to start cutting rates before the end of Q1 2024 (see Chart 4). Together with Colombia, Mexico is among the few central banks in the region that have not already started easing monetary policy.

Chart 4. Bank of Mexico to start easing monetary policy in Q1-2024

Source: LSEG Data & Analytics and EFGAM calculations. Data as of 7 December 2023.

Mexico will hold Presidential elections on 2 June which is likely to keep markets volatile in the first half of 2024. The candidate of incumbent MORENA party, Claudia Sheinbaum, is leading in the polls. She is expected to follow the same line as Lopez Obrador and, if Donald Trump wins the US Presidential election, the relation between Mexico-US should remain respectful. Candidates have not released their economic plans yet, which makes it difficult to anticipate any proposed reforms. But some potential issues have already appeared on the fiscal side, with a fiscal impulse in the first half of the year estimated at around 1.2%-1.5% of GDP, which should fade after the election and coincide with a slowing of the US economy. The overall deficit is expected to widen to over 5% of GDP in 2024.

Conclusion

The outlook for Brazil and Mexico is relatively positive. Next year should be characterized by lower in global GDP growth, and neither Brazil nor Mexico will be able to escape this trend. However, a soft landing of the global economy should help to cushion the impact. Brazil will benefit from strong commercial ties to China while a mild recession in the US will be positive for Mexico.³

The effects of high interest rates will be felt on domestic activity. Central banks are expected to continue, or start, cutting interest rates through 2024 which should give an upside to equity markets. Key challenges concern fiscal policy with reduced capacity to increase spending, given existing fiscal rules, as overall deficits remain high.

Developments around ‘El Niño’ will be important for crops in Brazil and commodity exports. This will be less of a concern for Mexico which relies more on manufacturing exports than agricultural products. Overall, the outlook for the first half of 2024 is supportive of financial markets in both economies. However, challenges could arise in the second half of the year if fiscal problems are not resolved.

¹ IMF World Economic Outlook, October 2023.
² ‘El Niño’ is a climate pattern that describes the unusual warming of surface waters in the eastern Pacific Ocean, affecting ocean currents, coastal fisheries and local weather from Australia to South America.
³ Mexican exports to the US represent 78% of Mexico’s total exports.

This document has been produced by EFG Asset Management (UK) Limited for use by the EFG International ("EFG Group" or "EFG") worldwide subsidiaries and affiliates within the EFG Group. EFG Asset Management (UK) Limited is authorised and regulated by the UK Financial Conduct Authority, registered no. 07389736. Registered address: EFG Asset Management (UK) Limited, Park House, 116 Park Street, London W1K 6AP, United Kingdom, telephone +44 (0)20 7491 9111.

This document has been prepared solely for information purposes. The information contained herein constitutes a marketing communication and should not be construed as financial research or analysis, an offer, a public offer, an investment advice, a recommendation or solicitation to buy, sell or subscribe to financial instruments and/or to the provision of a financial service. It is not intended to be a final representation of the terms and conditions of any investment, security, other financial instrument or other product or service. The content of this document is intended only for persons who understand and are capable of assuming all risks involved. Further, this document is not intended to provide any financial, legal, accounting or tax advice and should not be relied upon in this regard. The information in this document does not take into account the specific investment objectives, financial situation or particular needs of the recipient. You should seek your own professional advice (including tax advice) suitable to your particular circumstances prior to making any investment or if you are in doubt as to the information in this document.

The information provided in this document is not the result of financial research conducted by EFGAM’s research department. Therefore, it does not constitute investment or independent research as defined in EU regulation (such as “MIFID II” or “MIFIR”) nor under the Swiss “Directive on the Independence of Financial Research” issued by the Swiss Banking Association or any other equivalent local rules.

The value of investments and the income derived from them can fall as well as rise, and you may not get back the amount originally invested. Past performance is no indicator of future performance. Investment products may be subject to investment risks, involving but not limited to, currency exchange and market risks, fluctuations in value, liquidity risk and, where applicable, possible loss of principal invested.

Although information in this document has been obtained from sources believed to be reliable, no member of the EFG group represents or warrants its accuracy, and such information may be incomplete or condensed. Any opinions in this document are subject to change without notice. This document may contain personal opinions which do not necessarily reflect the position of any member of the EFG group. To the fullest extent permissible by law, no member of the EFG group shall be responsible for the consequences of any errors or omissions herein, or reliance upon any opinion or statement contained herein, and each member of the EFG group expressly disclaims any liability, including (without limitation) liability for incidental or consequential damages, arising from the same or resulting from any action or inaction on the part of the recipient in reliance on this document.

EFG and its employees may engage in securities transactions, on a proprietary basis or otherwise and hold long or short positions with regard to the instruments identified herein; such transactions or positions may be inconsistent with the views expressed in this document.

The availability of this document in any jurisdiction or country may be contrary to local law or regulation and persons who come into possession of this document should inform themselves of and observe any restrictions. This document may not be reproduced, disclosed or distributed (in whole or in part) to any other person without prior written permission from an authorised member of the EFG group.

Financial intermediaries/independent asset managers who may be receiving this document confirm that they will need to make their own independent decisions and in addition shall ensure that, where provided to end clients/investors with the permission from the EFG Group, the content is in line with their own clients’ circumstances with regard to any investment, legal, regulatory, tax or other considerations. No liability is accepted by the EFG Group for any damages, losses or costs (whether direct, indirect or consequential) that may arise from any use of this document by the financial intermediaries/independent asset managers, their clients or any third parties.

Comparisons to indexes or benchmarks in this material are being provided for illustrative purposes only and have limitations because indexes and benchmarks have material characteristics that may differ from the particular investment strategies that are being pursued by EFG and securities in which it invests.

The information and views expressed herein at the time of writing are subject to change at any time without notice and there is no obligation to update or remove outdated information.

Independent Asset Managers: in case this document is provided to Independent Asset Managers ("IAMs"), it is strictly forbidden to be reproduced, disclosed or distributed (in whole or in part) by IAMs and made available to their clients and/or third parties. By receiving this document IAMs confirm that they will need to make their own decisions/judgements about how to proceed and it is the responsibility of IAMs to ensure that the information provided is in line with their own clients’ circumstances with regard to any investment, legal, regulatory, tax or other consequences. No liability is accepted by EFG for any damages, losses or costs (whether direct, indirect or consequential) that may arise from any use of this document by the IAMs, their clients or any third parties.

If you have received this document from any affiliate or branch referred to below, please note the following:
Bahamas: EFG Bank & Trust (Bahamas) Ltd is licensed by the Securities Commission of the Bahamas pursuant to the Securities Industry Act, 2011 and Securities Industry Regulations, 2012 and is authorised to conduct securities business in and from The Bahamas including dealing in securities, arranging dealing in securities, managing securities and advising on securities. EFG Bank & Trust (Bahamas) Ltd is also licensed by the Central Bank of The Bahamas pursuant to the Banks and Trust Companies Regulation Act, 2000 as a Bank and Trust company. Registered office: Goodman's Bay Corporate Centre West Bay Street and Sea View Drive, Nassau, The Bahamas. Bahrain: EFG AG Bahrain is a branch of EFG Bank AG as licensed by the Central Bank of Bahrain (CBB) as Investment Business Firm Category 2 and is authorised to carry out the following activities: a) Dealing in financial instruments as agents; b) Arranging deals in financial instruments; c) Managing financial instruments; d) Advising on financial Instruments; and e) Operating a Collective Investment Undertaking. Registered address: EFG AG Bahrain Branch, Manama / Front Sea / Block 346 / Road 4626 / Building 1459 / Office 1401 / P O Box 11321 Manama -- Kingdom of Bahrain. Cayman Islands: EFG Wealth Management (Cayman) Ltd, is licensed and regulated by the Cayman Islands Monetary Authority (“CIMA”) to provide securities investment business in or from within the Cayman Islands pursuant to the Securities Investment Business Law (as revised) of the Cayman Islands. Registered Office: Suite 3208, 9 Forum Lane, Camana Bay, Grand Cayman KY1-1003, Cayman Islands. EFG Bank AG, Cayman Branch, is licensed as a Class B Bank and regulated by CIMA. Registered Office: EFG Wealth Management (Cayman) Ltd., Suite 3208, 9 Forum Lane, Camana Bay, Grand Cayman KY1-1003, Cayman Islands. Cyprus: EFG Cyprus Limited is an investment firm established in Cyprus with company No. HE408062, having its registered address at Kennedy 23, Globe House, 6th Floor, 1075, Nicosia, Cyprus. EFG Cyprus Limited is authorised and regulated by the Cyprus Securities and Exchange Commission (CySEC). Dubai: EFG (Middle East) Limited is regulated by the DFSA. This material is intended “for professional clients only”. Registered address: EFG (Middle East) Limited DIFC, Gate Precinct 5, 7th Floor PO Box 507245 - Dubai, UAE. Greece: EFG Bank (Luxembourg) S.A., Athens Branch is an non-booking establishment of EFG Bank (Luxembourg) S.A. which is authorised to promote EFG Bank (Luxembourg) S.A.’s products and services based on the EU freedom of establishment pursuant to a license granted by the Luxembourg financial supervisory authority “CSSF”. Registered address: 342 Kifisias Ave. & Ethnikis Antistaseos Str. - 154 51 N. Psychiko, General Commercial Registry no. 143057760001. Hong Kong: EFG Bank AG, Hong Kong branch (CE Number: AFV863) ("EFG Hong Kong") is authorized as a licensed bank by the Hong Kong Monetary Authority pursuant to the Banking Ordinance (Cap. 155, Laws of Hong Kong) and is authorized to carry out Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities in Hong Kong. Registered address: EFG Bank AG Hong Kong branch, 18th floor, International Commerce Centre, 1 Austin Road West, Kowloon, Hong Kong. To the fullest extent permissible by law and the applicable requirements to EFG Hong Kong under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, EFG Hong Kong shall not be responsible for the consequences of any errors or omissions herein, or of any information or statement contained herein. EFG Hong Kong expressly disclaims any liability, including (without limitation) liability for incidental or consequential damages, arising from the same or resulting from any action or inaction on the part of the recipient in reliance on this document. Liechtenstein: EFG Bank von Ernst AG is regulated by the Financial Market Authority Liechtenstein. Registered address: EFG Bank von Ernst AG Egertastrasse 10 - 9490 Vaduz, Liechtenstein. Jersey: EFG Wealth Solutions (Jersey) Limited is regulated by the Jersey Financial Services Commission in the conduct of investment business under the Financial Services (Jersey) Law 1998. Luxembourg: EFG Bank (Luxembourg) S.A. is authorised by the Ministry of Finance Luxembourg and supervised by the Commission de Surveillance du Secteur Financier (CSSF). EFG Bank (Luxembourg) S.A. is Member of the Deposit Guarantee Fund Luxembourg (F.G.D.L. - Fonds de Garantie des Dépôts Luxembourg) and Member of the Luxembourg Investor Compensation Scheme (S.I.I.L. - Système d’Indemnisation des Investisseurs Luxembourg). R.C.S. Luxembourg no. B113375. Registered address: EFG Bank (Luxembourg) S.A. - 56, Grand-Rue, L-1660 Luxembourg. Portugal: EFG Bank (Luxembourg) S.A. - Sucursal em Portugal is authorised and supervised by Banco de Portugal (register 280) and the CMVM, the Portuguese securities market commission, (register 393) for the provision of financial advisory and reception and transmission of orders. EFG Bank (Luxembourg) S.A. - Sucursal em Portugal is a non-booking branch of EFG Bank (Luxembourg) S.A., a public limited liability company incorporated under the laws of the Grand Duchy of Luxembourg, authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier). Lisbon Head Office: Avenida da Liberdade n.° 131 - 6° Dto., 1250 - 140 Lisboa. Porto agency: Avenida da Boavista, n.° 1837 - Escritório 6.2, 4100-133 Porto. Companies Registry Number: 980649439. Monaco: EFG Bank (Monaco) SAM is a Monegasque Limited Company with a company registration no. 90 S 02647 (Répertoire du Commerce et de l’Industrie de Monaco). EFG Bank (Monaco) SAM is a bank with financial activities authorised and regulated by the “Autorité de Contrôle Prudentiel et de Résolution” (French Prudential Supervision and Resolution Authority and by the “Commission de Contrôle de Activités Financières” (Monegasque Commission for the Control of Financial Activities). Registered address: EFG Bank (Monaco) SAM, Villa les Aigles, 15, avenue d’Ostende – BP 37 – 98001 Monaco (Principauté de Monaco), telephone: +377 93 15 11 11. The recipient of this document is perfectly fluent in English and waives the possibility to obtain a French version of this publication. People’s Republic of China (“PRC”): EFG Bank AG Shanghai Representative Office is approved by China Banking Regulatory Commission and registered with the Shanghai Administration for Industry and Commerce in accordance with the Regulations of the People’s Republic of China for the Administration of Foreign-invested Banks and the related implementing rules. Registration No: 310000500424509. Registered address: Room 65T10, 65 F, Shanghai World Financial Center, No. 100, Century Avenue, Pudong New Area, Shanghai. The business scope of EFG Bank AG Shanghai Representative Office is limited to non-profit making activities only including liaison, market research and consultancy. Singapore: EFG Bank AG, Singapore branch (UEN No. T03FC6371J) is licensed as a wholesale bank by the Monetary Authority of Singapore pursuant to the Banking Act 1970, an Exempt Financial Adviser as defined in the Financial Advisers Act 2001 and an Exempt Capital Markets Services Entity under the Securities and Futures Act 2001. This advertisement has not been reviewed by the Monetary Authority of Singapore. Registered address: EFG Bank AG Singapore Branch, 79 Robinson Road, #18-01, Singapore 068897. This document does not have regard to the specific investment objectives, financial situation or particular needs of any specific person. This document shall not constitute investment advice or a solicitation or recommendation to invest in this investment or any products mentioned herein. EFG Singapore and its respective officers, employees or agents make no representation or warranty or guarantee, express or implied, as to, and shall not be responsible for, the accuracy, reliability or completeness of this document, and it should not be relied upon as such. EFG Singapore expressly disclaims any liability, including (without limitation) liability for incidental or consequential damages, arising from the same or resulting from any action or inaction on the part of the recipient in reliance on this document. You should carefully consider, the merits and the risk inherent in this investment and based on your own judgement or the advice from such independent advisors whom you have chosen to consult, evaluate whether the investment is suitable for you in view of your risk appetite, investment experience, objectives, financial resources and circumstances, and make such other investigation as you consider necessary and without relying in any way on EFG Singapore. Switzerland: EFG Bank AG, Zurich, including its Geneva and Lugano branches, is authorised and regulated by the FINMA. Registered Office: EFG Bank AG, Bleicherweg 8, 8001 Zurich, Switzerland. Registered Swiss Branches: EFG Bank SA, 24 quai du Seujet, 1211 Geneva 2, and EFG Bank SA, Via Magatti 2, 6900 Lugano. United Kingdom: EFG Private Bank Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. EFG Private Bank Limited is a member of the London Stock Exchange. Registered company no. 02321802. Registered address: EFG Private Bank Limited, Park House, 116 Park Street, London W1K 6AP, United Kingdom, telephone +44 (0)20 7491 9111. USA: EFG Asset Management (Americas) Corp (“EFGAM Americas”) is a U.S. Securities and Exchange Commission (“SEC”) registered investment adviser providing investment advisory services. Registration with the SEC or any state securities authority does not imply any level of skill or training. EFGAM Americas may only transact business or render personalized investment advice in those states and international jurisdictions where it is registered, has notice filed, or is otherwise excluded or exempted from registration requirements. An investor should consider his or her investment objectives, risks, charges and expenses carefully before investing. For more information on EFGAM Americas, its business practices, background, conflict of interests, fees charged for services and other relevant information, please visit the SEC's public investor information site at: https://go.pardot.com/e/931253/2023-12-15/3swjr/304468363/h/MaaH08lfwgsUagEjS_nLTcjzomumPT_B4e7gaQqlIDs Also, you may visit: https://go.pardot.com/e/931253/firm-summary-158905-/3swjv/304468363/h/MaaH08lfwgsUagEjS_nLTcjzomumPT_B4e7gaQqlIDs In both of these sites you may obtain copies of EFGAM Americas’s most recent Form ADV Part 1, Part 2 and Form CRS. EFGAM Americas Registered address: 701 Brickell Avenue, Suite 1350 – Miami, FL 33131. EFG Capital International Corp. (“EFG Capital”) is a U.S. Securities and Exchange Commission (“SEC”) registered broker-dealer and member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Securities products and brokerage services are provided by EFG Capital. None of the SEC, FINRA or SIPC, have endorsed this document or the services and products provided by EFG Capital and its U.S. based affiliates. Registered address: 701 Brickell Avenue, Ninth Floor & Suite 1350 – Miami, FL 33131. EFG Capital and EFGAM Americas are affiliated by common ownership under EFGI and maintain mutually associated personnel. The products and services described herein have not been authorized by any regulator or supervisory authority, and further are not subject to supervision by any regulatory authority outside of the United States. Please note the content herein was produced and created by EFG Bank AG/EFG Asset Management (UK) Limited (as applicable). This material is not to be construed as created or otherwise originated from EFG Capital or EFGAM Americas. Neither EFGAM Americas nor EFG Capital represent themselves as the underlying manager or investment adviser of this Fund/ product or strategy. EFG Asset Management (North America) Corp. ("EFGAM NA") is a US Securities and Exchange Commission (SEC) Registered Investment Adviser For more information on EFGAM NA Corp, its business, affiliations, fees, disciplinary events, and possible conflicts of interests please visit the SEC Investment Advisor Public Disclosure website (https://go.pardot.com/e/931253/2023-12-15/3swjy/304468363/h/MaaH08lfwgsUagEjS_nLTcjzomumPT_B4e7gaQqlIDs) and review its Form ADV. Information for investors in Australia: For Professional, Institutional and Wholesale Investors Only. This document has been prepared and issued by EFG Asset Management (UK) Limited, a private limited company with registered number 7389736 and with its registered office address at Park House, Park Street, London W1K 6AP (telephone number +44 (0)20 7491 9111). EFG Asset Management (UK) Limited is regulated and authorized by the Financial Conduct Authority No. 536771. EFG Asset Management (UK) Limited is exempt from the requirement to hold an Australian financial services licence in respect of the financial services it provides to wholesale clients in Australia and is authorised and regulated by the Financial Conduct Authority of the United Kingdom (FCA Registration No. 536771) under the laws of the United Kingdom which differ from Australian laws. This document is personal and intended solely for the use of the person to whom it is given or sent and may not be reproduced, in whole or in part, to any other person. ASIC Class Order CO 03/1099 EFG Asset Management (UK) Limited notifies you that it is relying on the Australian Securities & Investments Commission (ASIC) Class Order CO 03/1099 (Class Order) exemption (as extended in operation by ASIC Corporations (Repeal and Transitional Instrument 2016/396) for UK Financial Conduct Authority (FCA) regulated firms which exempts it from the requirement to hold an Australian financial services licence (AFSL) under the Corporations Act 2001 (Cth) (Corporations Act) in respect of the financial services we provide to you.

UK Regulatory Requirements The financial services that we provide to you are regulated by the FCA under the laws and regulatory requirements of the United Kingdom which are different to Australia. Consequently any offer or other documentation that you receive from us in the course of us providing financial services to you will be prepared in accordance with those laws and regulatory requirements. The UK regulatory requirements refer to legislation, rules enacted pursuant to the legislation and any other relevant policies or documents issued by the FCA.

Your Status as a Wholesale Client In order that we may provide financial services to you, and for us to comply with the Class Order, you must be a 'wholesale client' within the meaning given by section 761G of the Corporations Act. Accordingly, by accepting any documentation from us prior to the commencement of or in the course of us providing financial services to you, you:
• warrant to us that you are a ‘wholesale client’;
• agree to provide such information or evidence that we may request from time to time to confirm your status as a wholesale client;
• agree that we may cease providing financial services to you if you are no longer a wholesale client or do not provide us with information or evidence satisfactory to us to confirm your status as a wholesale client; and agree to notify us in writing within 5 business days if you cease to be a 'wholesale client' for the purposes of the financial services that we provide to you.

© EFG. All rights reserved

Unsubscribe | Email Preference Center