In a year of strength for emerging markets equities and exchange traded funds, Latin America is driving that resurgence. Rebounding commodities prices and the weaker dollar are key reasons why Latin America ETFs are rebounding.
However, U.S. presidential politics could impact the near-term performance of Latin American equities and the corresponding ETFs.
Latin America’s central bank policies are notable, at least among the region’s two largest economies, Brazil and Mexico. Although Brazil’s central bank has not hiked interest rates since last year, its benchmark borrowing cost of 14.25% is among the highest in the world, emerging or developed markets. Earlier this year, Mexico’s central bank surprisingly raised rates to help prop up the peso.
Related: How Central Banks Affect LatAm ETFs
Mexico is at risk as its reserve coverage ratio, or foreign exchange reserves divided by its funding gap, is just 1.6 years, which is less than the seven years of Russia, another oil exporter. Additionally, Mexico is constrained by its near-zero real interest rate, leaving little room to cut rates if its economy weakens.