2022 could be Latin America’s year as it fills the economic void left by Russia. Here's how to play it

Published Wed, Mar 30 202212:11 PM EDTUpdated Wed, Mar 30 20228:17 PM EDT

Latin American stocks have been on fire to start 2022, and they could gain even more steam as the year goes on. The iShares Latin America 40 ETF (ILF) , which is made up of 40 of the largest stocks in the region, is up more than 29% year to date. That's more than enough to beat out the broader iShares MSCI Emerging Markets ETF (EEM) , which is down 5.4% in that time. The ILF is also outperforming the S & P 500, which is down 3% for 2022. The iShares MSCI ETF made up specifically of Brazilian names, the EWZ, has also popped 35%; its Mexican stocks counterpart , the EWW, is up 8% for 2022. ETFs tracking stocks in Argentina, Peru and Chile — the Global X MSCI Argentina ETF (ARGT) , iShares MSCI Peru and iShares MSCI Chile ETF — are also up sharply for the year. Even though it's early in the year, analysts and investors say they think these stocks could do well as 2022 rolls on. Two of the key reasons for this potentially sustained outperformance going forward are: A commodities vacuum left by the Ukraine-Russia war Ultra-low valuations relative to the rest of the world "Latin America has cheap valuations, and it's a place that actually benefits from what's happening on the commodities side" due to the conflict in Ukraine, T. Rowe Price Latin America fund (PRLAX) manager Verena Wachnitz told CNBC. "Valuations are cheap in most countries and most sectors. … In terms of trade, [the war] will be positive for several countries in the region." Commodities vacuum Stocks in Latin America could also benefit as commodities exports in the region grow due to the Ukraine-Russia war. Russia and Ukraine are major exporters of a wide range of commodities, including wheat and corn. But as the war rages on, "a void in critical materials has opened up," creating an opportunity for Latin American countries with similar exports to gain market share going forward, Bank of America's Ajay Singh Kapur said in a note earlier this month. In 2020, Russia and Ukraine accounted for 26% of global wheat exports and nearly 15% of corn exports around the world, Bank of America data shows. Both countries also made up more than 10% of frozen fish, more than 50% of sunflower-seed and over a fifth of worldwide barley exports. Latin America was also a major exporter of these goods in 2020, positioning the region to capitalize on the commodities vacuum left by Russia and Ukraine. "LatAm, being a global supplier of agricultural products and hard commodities, is key within the new order of global trade, as supply from Russia is impacted by sanctions and supply chain disruptions," Bank of America found. 'Deeply discounted valuations' Latin Americans stocks have underperformed relative to other global markets in recent years. From the start of 2020 through the end of 2021, the iShares Latin America ETF lost nearly 31% of its value, while the S & P 500 rallied 47.5%. The iShares MSCI Emerging Markets ETF also outpaced the Latin America ETF in that time, climbing 8.9%. At the country level in Latin America, the Brazil stock ETF plunged more than 40% between 2020 and the end of 2021. Stocks in the Mexico ETF rose 12.4% over that two-year period, but they still lagged the S & P 500 and the iShares MSCI All Country World Index ETF (ACWI) — which popped 33.5%. This underperformance has left stocks in the region at "deeply discounted valuations," according to Bank of America. Kapur noted that the trailing price-earnings ratio for Latin American stocks is at 7.5 — an all-time low. The region's trailing PE ratio relative to the rest of the world of 0.4 times earnings is also sharply below a long-term average of about 0.8 times earnings. "Recessions, policy and political uncertainty, and devastating Covid waves (27% of global deaths and 14% of global cases vs. 8% of the global population) has constrained the GDP of the region below pre-pandemic levels," Kapur said in a note earlier this month. "But we think a catch-up may be on the cards." "LatAm looks set to embark on a new growth upcycle as uncertainties around Covid fade (vaccinations above 70%), especially if China reflates," Kapur added. "Discounted valuations (all-time low trailing P/E of 7.5x) and competitive currencies … makes it even more appealing in our view." What to buy For investors looking to capitalize on Latin America's strength, they may want to look at the region's largest economy: Brazil. Brazil is one of the best-positioned markets in Latin America going forward from a technical and fundamental standpoint, according to analysts. Credit Suisse's David Sneddon noted Tuesday that the Bovespa index , Brazil's benchmark stock index, has confirmed a "'head & shoulders' base above the 115,950 March high." He added that this move sets up the index for a move back to its 2021 high of 131,190 — which is 9.3% above its Tuesday closing level. On the fundamental side, Brazil benefits from nearly no direct exposure to Russia in terms of trade, local rates close to peaking and substantial exposure to commodities, Bank of America noted. T. Rowe Price's Wachnitz also said that Brazil's "diversity of companies across sectors" makes the country an attractive bet. Wachnitz's fund is overweight financials, with Brazil-based Itau Unibanco as its largest holding. The company's U.S.-listed shares have been on fire this year, rallying nearly 53%. Oil giant Petrobras is another large holding in the fund; its U.S.-listed shares are up 33% in 2022. For investors who don't feel comfortable delving into individual names in a foreign market, the iShares MSCI Brazil ETF may be an option. The fund has an expense ratio of just 0.57% and is made up of large and midsize companies in Brazil. To be sure, Brazilian stocks could see some volatility this year in the lead-up to the country's presidential election — which could see market-friendly President Jair Bolsonaro losing his reelection bid to left-wing former President Luiz Inacio Lula da Silva. Higher commodity prices could also prove to be a double-edged sword for Brazil — and Latin America, in general — as they drive up already high inflation. Still, Bank of America noted that the region's large exposure to the financials sector give it a cushion against higher rates and inflation. Wachnitz also said that Latin American stocks are attractive despite these potential headwinds given their low valuation.

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Latin American stocks have been on fire to start 2022, and they could gain even more steam as the year goes on.