Broadly speaking, 2022 is shaping up to be another rough year for emerging markets equities, but upon closer examination, there are pockets of strength amid the calamity caused by Chinese and Russian stocks.
On a regional basis, Latin America is an obvious standout. For example, the First Trust Latin America AlphaDEX Fund (NYSE: FLN) is higher by 18% year-to-date while the MSCI Emerging Markets Index is lower by 9.46%.
FLN, which is 11 years old and tracks the NASDAQ AlphaDEX® Latin America Index, is clearly standing out for the better at a time of headwinds for the broader emerging markets complex. Some analysts believe that there’s more upside to be had with Latin American stocks and the related exchange traded funds.
“In their baseline scenario, our Global Commodity strategists expect Russian commodity flows to be rerouted away from Europe and the US. Latin America is well-positioned to fill this void as a global market leader in exports ranging from agribusiness to hard commodities like iron ore and nickel,” said Bank of America analysts in a recent report.
FLN is levered to those themes, as the materials and energy sectors combine for nearly 39% of the ETF’s weight. Other data points underscore the First Trust ETF’s leverage to the commodities trade.
“Brazil accounts for 22% of global iron ore exports with 6% of the world’s nickel production and pulp shipments coming from Latin America. LatAm also accounts for more than 50% of the global orange juice, soy oil, and coffee exports,” adds Bank of America.
Brazil isn’t just Latin America’s largest economy. It’s the largest country exposure in FLN, representing 51.76% of the fund’s weight as of April 11, according to issuer data. Bank of America strategist David Becker recommends an overweight view on Brazilian equities, citing earnings growth potential value in that market.
Latin American stocks could also be in for an extended period of outperformance because the factors that made the region’s laggards are fading.
“Our strategists suggest that LatAm underperformance to this point can be at least partially explained by a string of recessions, political uncertainty, and devastating Covid waves (27% of global deaths and 14% of global case counts vs. only 8% of global population),” notes Bank of America.
Currently, 83% of the region’s population is at least partially vaccinated. Another benefit with FLN is that the fund has exposure to Peurvian stocks, which is relevant because Peru has been one of the region’s worst-performing equity markets since the COVID-19 lows.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.