Latin American equities had a rough Q3 2021, as the S&P Latin America BMI fell 14.7% in USD terms, driven by a steep drop in Brazilian equities and the U.S. dollar strengthening against local currencies. This weak result offset sizable gains from earlier in 2021, leaving the regional benchmark with a 7% loss YTD. However, on a 12-month horizon, the S&P Latin America BMI remained up 25.4%, outperforming the S&P Emerging BMI by about 5%.
While recent political uncertainty and civil unrest in the region have contributed to these results, on a global perspective, events abroad also have had an impact on equities, with emerging markets being the most affected. The S&P 500® ended the quarter nearly flat, up 0.6%, after reaching new records during late August and early September. Uncertainty over China’s Evergrande Group’s debt negotiations also had a negative effect on global markets; the S&P/BMV China SX20 lost 15.7% and the S&P Emerging BMI decreased 6.2% during Q3.
However, at a country level, results were mixed. The countries that performed the best during Q3 were Argentina, Colombia, and Mexico, which had positive returns in local currency as demonstrated by the S&P MERVAL Index (24.0%), the S&P Colombia Select Index (8.7%), and the S&P/BMV IRT (2.8%), respectively. The case of Argentina is particularly noteworthy, with the S&P MERVAL Index posting solid returns of 51.0% in local currency and 28.7% in U.S. dollar terms YTD, making it an outlier in the region. On the flip side, the S&P Brazil BMI and the S&P/BVL Peru Select 20% Capped Index were the underperformers of the group in Q3, down 13.9% and 4.9%, respectively. Chile’s S&P IPSA was nearly flat for the quarter.
All sectors across the S&P Latin America BMI posted negative returns in Q3. Procyclical sectors, such as Consumer Discretionary, Information Technology, and Materials, were the most affected, losing 32.6%, 28.2%, and 21.4%, respectively. Defensive sectors, such as Real Estate and Utilities, had better relative performance, losing only 12.7% and 7.8%, respectively. Lastly, the sole bright spot during the quarter from the sector perspective was Communication Services, which ended nearly flat.
In times of high volatility, it is interesting to see how different factor indices perform under current market conditions. Perhaps unsurprisingly, we saw that in Brazil and Mexico, value, low volatility, and risk-weighted indices performed best in Q3, as lower volatility and value-oriented companies were in favor in a generally risk-off environment. In Q3, the S&P/BMV IPC CompMx Enhanced Value Index gained 2.3% in MXN, while the S&P/B3 Enhanced Value Index returned -1.9% in BRL.
Shifting focus to the longer term, we see that the majority of factor indices outperformed the broader market over the past 10 years, illustrating the benefits of using a non-market-cap-weighted indexing approach.
As the end of the year approaches, many risks are still clouding equity markets in Latin America. The continued spread of COVID-19 variants continues despite increased vaccination rates. Important local elections that will shape the new policies of several countries in the region are also slated to occur. Stay tuned for what promises to be an exciting year end in the region.