COVID-19 has hit Latin America, both in terms of casualties and economically. GDP shrank about 7 per cent in 2020 despite interest rates being cut to record lows and government spending that resulted in budget deficits and heightened public debt. Yet, the region’s problems pre-date the pandemic.
The region was already on a low-growth trajectory because of stalled structural reforms, premature deindustrialisation and tepid investment. Annual growth averaged just 1.7 per cent during 2011-19 when other emerging markets averaged 4.8 per cent.
Latin America will bounce back in 2021 as lockdowns are lifted. However, the structural problems, slow inoculation rates and the limited room for additional monetary and fiscal support, mean we expect growth of just 3.8 per cent – one of the slowest emerging-market rebounds.
Peru is forecast to show the largest rebound, growing 8.5 per cent in 2021 after contracting 11.2 per cent last year, but the healthcare situation and April’s general election will delay the recovery.
Chile conducted one of the region’s most aggressive monetary and fiscal easing responses and is leader in rolling-out vaccines, allowing a swifter return to normalisation. We expect 4.5 per cent growth after GDP shrank 6.0 per cent last year.
Brazil’s economy contracted less than most others in the region, thanks to fiscal stimulus totalling around 12 per cent of GDP and cutting interest rates from 4.5 per cent to a 2 per cent all-time low. GDP could grow 3.2 per cent this year, supported by a vaccination push.
However, we expect just 3.0 per cent growth in Mexico, with exporters, especially those selling to the US, likely to experience the fastest improvement.
The region’s main countries all have relatively high coronavirus death rates and South America is likely to lag Europe and North America in vaccine roll-out. The region accounts for about 15 per cent of global reported COVID-19 cases but, as of February, less than 3 per cent of vaccine doses administered.
But two factors could boost Latin American growth: mainland China’s strong growth requires exports, and commodity prices are at multi-year highs, fuelled by Chinese demand and reflation expectations.
The region’s Chinese sales have nearly tripled since 2009 and now comprise 17 per cent of total exports. Mainland China is the major export destination for Chile, Brazil and Peru and important also to Colombia and Argentina.
But mainland China has also become a source of financing and capital. Brazil has received the most foreign direct investment – USD60 billion since 2005. But relative to GDP, Peru’s 13.7 per cent rate is highest, thanks to investments in metals and energy. Inflows are also sizeable for Argentina and Chile.
The pandemic sharply slowed Chinese investment into the region in 2020 but we expect it to accelerate this year. We reckon that a 1 percentage point rise in Chinese GDP growth increases emerging economies’ growth by an average of 0.4 to 0.6 points, with commodity-producing countries gaining most. The region remains a net commodity exporter and prices of all major commodities – metals, agricultural and energy – have recovered strongly from the slump in early 2020.
The improvement in Latin America’s terms of trade should help its currencies, which have lost about 6 per cent of their value each year since the 1990s, requiring high interest returns for foreign investors.
First published 24 February 2021.
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Important disclosures
Foreign exchange: Basis for financial analysis
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HSBC’s currency trade ideas on deliverable FX forwards (DF) or non-deliverable FX forwards (NDF) are usually identified on a time horizon of up to three months, although HSBC reserves the right to extend this time horizon on a discretionary, trade-by-trade basis.
HSBC believes an investor's decision to buy or sell an instrument should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.
Definitions for currency trades on DFs and NDFs
Buy: refers to buying the first currency in the named pair in exchange for the second currency in the named pair.
Sell: refers to selling the first currency in the named pair in exchange for the second currency in the named pair.
The tenor of the instrument will be denoted and will refer to a settlement date relative to the opening date of the trade idea e.g. 1m refers to a settlement date 1 month forward from the open date of the trade idea. NDF trades normally fix two working days prior to the settlement date.
Distribution of currency trades
The nature of foreign exchange forward trade ideas is such that there will always be an equal number of buy and sell trades (buying one currency in exchange for selling another), both outstanding and historically.
Equities: Stock ratings and basis for financial analysis
HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities
As of 24 February 2021, the distribution of all independent ratings published by HSBC is as follows:
Buy 55% ( 30% of these provided with Investment Banking Services )
Hold 36% ( 27% of these provided with Investment Banking Services )
Sell 9% ( 23% of these provided with Investment Banking Services )
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.
Fixed income: Basis for financial analysis
This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its fixed income research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies in corporate credit and based on country-specific ideas or themes that may affect the performance of these bonds in the case of covered bonds, in both cases on a six-month time horizon; 2) to identify trade ideas on a time horizon of up to four months, relating to specific instruments, which are predominantly derived from relative value considerations or driven by events and which, in the case of credit research, may differ from our long-term opinion on an issuer. Buy or Sell refer to a trade call to buy or sell that given instrument; HSBC has assigned a fundamental recommendation structure, as described below, only for its longer-term investment opportunities.
HSBC believes an investor's decision to buy or sell a bond should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.
HSBC Global Research is not and does not hold itself out to be a Credit Rating Agency as defined under the Hong Kong Securities and Futures Ordinance.
Definitions for fundamental credit and covered bond recommendations Overweight: For corporate credit, the issuer’s fundamental credit profile is expected to improve within the next six months. For covered bonds, the bonds issued in this country are expected to outperform those of the other countries in our coverage over the next six months.
Neutral: For corporate credit, the issuer’s fundamental credit profile is expected to remain stable for up to six months. For covered bonds, the bonds issued in this country are expected to perform in line with those of the other countries in our coverage over the next six months.
Underweight: For corporate credit, the issuer’s fundamental credit profile is expected to deteriorate within the next six months.
For covered bonds, the bonds issued in this country are expected to underperform those of other countries in our coverage over the next six months.
Definitions for trades (Rates & Credit)
Buy and Sell refer to a trade call to buy or sell a bond, option on an interest rate swap ("swaption"), interest rate cap or floor, inflation cap or floor, or Total Return Swap ("TRS"). The buyer/seller of a TRS receives/pays the total return of the underlying instrument or index at the end of the period and pays/receives the funding leg.
Buy protection and Sell protection refer to a credit default swap (CDS): the protection buyer/seller is effectively selling/buying the reference entity's credit risk.
Pay and receive refer to a trade call to pay or receive the fixed leg of an interest rate swap (IRS), a non-deliverable IRS, the first-named leg of a basis swap, the realised inflation leg of an inflation swap, or a forward rate agreement (FRA). An investor that executes a pay or receive trade is said to be "paid" or "received."
Payer and receiver refer to inflation caps or floors and to swaptions: a payer is an option giving the right but not the obligation to enter a paid position in an interest rate or inflation swap, and a receiver is an option giving the right but not the obligation to enter a received position in an interest rate or inflation swap.
ASW (also asset-swap, Buy on asset swap, Buy on an asset-swapped basis): Buy a bond packaged with a swap that is tailored to eliminate the bond’s interest rate risk, effectively transforming the bond to a floating rate instrument whilst preserving the credit exposure to the bond issuer.
RASW (also reverse asset-swap, Sell on asset swap, Sell on an asset swapped basis): Sell a bond packaged with a swap that is tailored to eliminate the bond’s interest rate risk, effectively transforming the bond to a floating rate instrument whilst preserving the credit exposure to the bond issuer.
Distribution of fundamental credit and covered bond recommendations
As of 23 February 2021, the distribution of all independent fundamental credit recommendations published by HSBC is as follows:
All Covered issuers Issuers to whom HSBC has provided Investment Banking in the past 12 months
Count Percentage Count Percentage
Overweight 126 27 70 56
Neutral 220 47 89 40
Underweight 127 27 47 37
Source: HSBC
For the purposes of the distribution above the following mapping structure is used: Overweight = Buy, Neutral = Hold and Underweight = Sell. For rating definitions under both models, please see "Definitions for fundamental credit and covered bond recommendations" above.
Distribution of trades
As of 31 December 2020, the distribution of all trades published by HSBC is as follows:
All Covered instruments Issuers to whom HSBC has provided Investment Banking in the past 12 months
Recommendation Count Percentage Count Percentage
Buy 143 76 90 63
Sell 46 24 21 46
Source: HSBC
For the purposes of the distribution above the following mapping structure is used: Buy/Sell protection/Receive/Buy Receiver/Sell Payer = Buy; and Sell/Buy protection/Pay/Buy Payer/Sell Receiver = Sell. ASW is counted as a buy of the bond and a paid swap, and RASW as a sell of the bond and a received swap. For rating definitions under both models, please see "Definitions for trades (Rates and Credit)" above.
For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.
Recommendation changes for long-term investment opportunities
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Additional disclosures
- This report is dated as at 24 February 2021.
- All market data included in this report are dated as at close 22 February 2021, unless a different date and/or a specific time of day is indicated in the report.
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