In the age of the “everything bubble”, it’s not often that you come across a chart saying something is outright cheap, or even near-record lows for that matter…
And I know what you might be thinking — “it’s cheap for a reason“ or “it’s a value trap“ or maybe even “valuations don’t matter“.
And there are situations where either or all 3 of those claims can genuinely apply.
For example, “cheap for a reason“ is almost always true, because most of the time when an asset or market is cheap it’s because of a cyclical deterioration in fundamentals, or some kind of shock/crisis, or some other logical reason. A lot of the time that deterioration is transitory, and markets often overreact to that deterioration — driving valuations down further than they really should be (aka opportunities).
Meanwhile, “it’s a value trap“ can definitely apply when that fundamental deterioration is structural/permanent, or when you’re in the part of the cycle where cheap can get cheaper, or where there’s no logical catalyst for valuations/prices to rise and for things to turn around.
And lastly, “valuations don’t matter“ is often something you hear when there is a strong trend in place (either up or down) — in which case, valuations don’t really matter that much per se in the short-term as momentum is in control. But it tends to be more of a passing phase and can tell you a lot about sentiment when more and more people start saying that. And in the end valuations can go from not mattering at all to being all that matters.
It’s worth meandering through these distinctions first because it helps frame how to think about charts like this week’s one + pre-addresses points some folk might raise, and ultimately, it helps us take a more rigorous approach.
LatAm equities are cheap for a reason (past macro headwinds, weakening FX trend, inflation problems, governance problems, etc), but where we have gotten to in the chart below is I would say, unreasonably cheap.
As for the value trap aspect, it’s always a risk with valuation-driven opportunities like this one; you’re waiting for some kind of upside mean reversion — and you may need to emphasize patience in waiting. But there are a few things coming right for this region e.g. earnings momentum is turning up (see bonus chart), positioning is near record underweights, FX is looking more attractive, and technicals are very promising.
And as for valuations mattering or not — I think it should be obvious that they matter more at turning points, which is precisely what I just outlined, and if you look at the bonus chart below it looks very turny.
Of course, it’s not without risks, and there are some points of confirmation we can look for to build conviction, but as things stand I think this is one of the most underappreciated opportunities in global equities at the moment.
Key point: LatAm equities are extremely cheap and a turning point is in progress.
BONUS CHART: My work is all about finding puzzle pieces and putting them together in a way that makes things obvious for my clients — the chart below is an excellent example and complement to the valuation chart above.
It highlights how not only are LatAm Equities cheap, but the index is turning up off a major support level, and earnings momentum is turning up after a reset.
It’s this type of evidence that helps avoid value traps and finesse timing, building the larger picture up and providing tactical evidence to raise conviction.
Taken together, it makes for a compelling picture for LatAm Equities.