CHIEF INVESTMENT OFFICE

LatAm Insights

Playing to “Greener” Strengths? March 2021

Better data in many major economies, unprecedented stimulus in Europe and the U.S., AUTHOR
and progress in a worldwide effort to inoculate populations against the coronavirus,
Rodrigo C. Serrano, CFA®
among other elements, have underpinned equity market optimism. In anticipation of a
Director and Senior
normalization of business activity later this year, more cyclical, Value-oriented sectors
Investment Strategist
– such as Financials and Energy – have performed well, as have industrial “brown”
commodities, such as iron ore and copper. We believe this climate has played to the
strengths of Latin America (LatAm).

Meanwhile, global policy moves emphasizing the need to combat climate change have
shifted investors’ attention to the expansion of cleaner future industries and the “green”
commodities needed to power their evolution. A principal one is lithium, also known as
“white gold,” and nearly 60% of the world’s resource is found in a tract of land, called the
"Lithium Triangle," straddling Bolivia, Argentina and Chile, according to the U.S. Geological
Survey (USGS). Transforming to a cleaner, greener global economy could also suit LatAm
well, in our view.

However, the risks are prominent. Regulation, supply-demand imbalances, and even
environmental concerns may result in higher-than-expected costs, curtailing the global
transition. In LatAm, political uncertainty will probably stay elevated this year, with general
elections still set to take place in seven countries, among other events and dynamics.

From Transitory…
According to the World Bank, commodities can be subject to transitory shocks by recessions,
among other triggers. In our opinion, the one caused by the global economic downturn during
the first half of 2020 was a major cause of double-digit percentage declines for most raw-
material prices, which dragged down the Bloomberg Commodity Index (BCI) to a return of
-17.2% from the beginning of February to the end of March in 2020.1

Past performance is no guarantee of future results.

Performance during periods of exceptional market conditions should not be expected to be repeated in a normal
market environment.
Performance results are extremely short term and do not provide an adequate basis for evaluating performance potential
over varying market conditions or economic cycles. Investment results may have been different had another time period
been chosen for this example.  

1
All returns are on a total-return basis.

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The fading of this shock has been helped in part by V-shaped recoveries in global
manufacturing and trade volumes, as well as one in China’s economy, in our view. These
elements, plus shocks on the supply side, have factored into the outperformance of
industrial metals (see Exhibit 1).2 From the end of March last year until March 12th of this
year, they have collectively returned 54.5%, compared to 39.1% for the broader BCI. This
development generally aligns with research done by the World Bank, which shows that
business-cycle fluctuations have had a greater impact on these types of raw materials.3

Exhibit 1: Within the Bloomberg Commodity Index, industrial metals have

outperformed.

Indexed to 100 on March 23, 2020

210
Headline Index Energy sub-index
200
Agriculture sub-index Livestock sub-index
190
Precious metals sub-index Industrial metals sub-index
180
170
160
150
140
130
120
110
100
90
80
70
0

21

1
9

20

20

20

20

t-2
r-2

v-2

c-2

-2

-2
c-1

-2

-2

-2

l-2

b-
b-

g-

p-
n-

ar
ar

ay

Jan
Jan

Ju
Ap

Oc

De
De

No
Au

Fe
Fe

Se
Ju

M
M

Source: Bloomberg, Chief Investment Office. Data as of March 12, 2021. Past performance is no guarantee of
future results. Performance during periods of exceptional market conditions should not be expected to be repeated in
a normal market environment. Performance results are extremely short term and do not provide an adequate basis for
evaluating performance potential over varying market conditions or economic cycles. Investment results may have been
different had another time period been chosen for this example.

This macroeconomic environment has been particularly beneficial for LatAm, which
in 2019 featured one or more top-five global miners of aluminum, iron ore, lead, tin
and zinc, all goods for which China was a top-five importer or consumer.4 Another was
copper, in which Chile and Peru mined just under 40% of the world’s supply.5

We believe that low global interest rates and plentiful liquidity, which have spurred capital
inflows into the region, have also buoyed precious metals such as gold. Peru, Mexico and
Brazil rank as the sixth-, ninth- and 10th-largest global producers respectively, according to
the World Gold Council. A depreciation of the U.S. dollar since late March has also helped
support food prices. According to a report from the World Bank in late-November last year,
nearly half of the rise in its food price index since May 2020 may have been attributed to
movements in the greenback. On a year-over-year (yoy) basis, this indicator rose 26.2%
in February, supported by a 44.6% average appreciation in the components of soybeans
produce, a grain in which Brazil and Argentina rank first and third in global production.6

Past performance is no guarantee of future results.

Performance during periods of exceptional market conditions should not be expected to be repeated in a normal
market environment.
Performance results are extremely short term and do not provide an adequate basis for evaluating performance potential
over varying market conditions or economic cycles. Investment results may have been different had another time period
been chosen for this example. 

2
Commodity Markets Outlook – A World Bank Report (October 2020)
3
Persistence of commodity shocks – The World Bank (November 12, 2020)
4
Ibid
5
Ibid
6
Source: World Bank. YoY, Soybean produce includes raw soybeans (53.0%), soybean meal (51.7%) and soybean oil
(29.0%). Simple average used.

2 of 7  March 2021 – LatAm Insights

…to Permanent?
Permanent shocks, according to the World Bank, can be caused by technological
advancements, such as fracking, which made the U.S. a net-energy exporter in 2019
and transformed global energy markets. They can also be triggered by policy changes.
In the early 1990s, passage of the U.S. Energy Policy Act played a role in raising crop
productivity aimed at producing biofuels.

More recently, U.S. President Joseph R. Biden Jr. has called climate change “the existential
threat of our time.” In addition to signing an executive order for the U.S. to rejoin the
Paris Climate Accords, among other climate-friendly measures, his administration’s
proposal to invest $2 trillion over four years aims to accelerate the development of
the country’s clean-energy economy. Additionally, the EU, which has presented its own
Green Deal, and China have both pledged to achieve net-zero carbon emissions by 2050
and 2060 respectively. Fulfilling these pledges may present permanent shocks in many
commodity markets, in our view. According to Bank of America (BofA) Global Research,
in addition to a desire to showcase their global leadership on this issue, governments in
these and other countries worry over the possible economic damage caused by climate
change, estimated to range between $54 trillion and $69 trillion by 2100, adjusted for
different climate scenarios, according to Moody’s Analytics. This would be equivalent to
about 40% to 50% of the nominal value of the world’s gross domestic product (GDP)
in 2019.7

BofA Global Research expects the market for climate mitigation solutions, including the
electrification of transport and clean energy, to double by 2025 to $2 trillion per annum.
Moreover, it notes that the Intergovernmental Panel on Climate believes this industry
would need to see investment approaching $4 trillion per year to achieve net zero
emissions. In addition to lithium, used in the batteries of fuel-cell and all-electric vehicles
(EVs), metals such as nickel, silver, and even copper and aluminum have received investor
focus for their integral roles in operations ranging from wind and solar power to energy
storage and carbon-capture applications.8 For most of these metals, LatAm is or could
become a major exporter.

Chile and Argentina are already the second- and fourth-largest global producers of
lithium, according to USGS. In our view, the potential for expansion is significant given
a forecast increase in EV sales from 3 million in 2020 to 22.5 million by 2030 in the
U.S., Europe and China.9 With the Pacific Ocean allowing for easy export access, Chile’s
higher-quality lithium is cheap to extract.10 Brine is pumped from underwater basins into
massive solar-evaporation pools which dot the Salar de Atacama desert. The region’s
intense sunlight then evaporates most of the water, leaving behind the lithium, a process
also used in mining projects in the Jujuy and Catamarca provinces of Argentina. Attuned
to the potential opportunity, this country’s government has recently established a lithium
governmental board to improve the ease of doing business for this industry, according
to the Congress and Exhibition Lithium Latin America group. Bolivia’s new president,
Luis Arce, presented a strategy document during his campaign calling for a significant
increase in the country’s lithium-producing capacity to convert the nation into the
“lithium capital of the world.”11 Topping Argentina and Chile, the USGS estimates that the
country holds the world’s largest concentration of the resource, at about 26%.

Aside from copper, which can be used in a wide array of clean technologies, roughly
50% of the world’s production of silver, used in solar-power infrastructure, occurs

7
The report references economic damage of $54 trillion by 2100 under a warming scenario of a 1.5°C deviation and $69
trillion under a warming scenario of a 2°C deviation from the base period of 1986-2005. In 2019, the size of the world
economy was $133 trillion in current U.S. dollars, according to the World Bank.
8
Climate Wars – Thematic Investing – Bank of America Global Research (February 2, 2021)
9
Ibid
10
Chile, once the world's lithium leader, loses ground to rivals – Reuters (May 30, 2019)
11
The world needs lithium. Can Bolivia’s new president deliver it? – Grist (November 12, 2020)

3 of 7  March 2021 – LatAm Insights

in LatAm, led by Mexico.12 Meanwhile, the World Bank registers Brazil as the world’s
fourth-largest producer of Bauxite, an ore manufactured into aluminum, another metal
with a wide variety of uses in clean industries. The country also holds the world’s third-
largest reserves of nickel, a metal expected to play a greater role in the production of EV
batteries, according to consultancy CRU.

In processing these green commodities, the Chilean and Argentine governments aim
to break their countries from their historical role in the supply of raw materials, a goal
we think other LatAm governments aspire to. Instead of engaging in low value-add
activities – such as extraction, then shipping materials for products produced elsewhere
– capturing more of the lifecycle of these commodities could bring greater investment
and inclusive prosperity.13

But, Are we Getting Ahead of Ourselves?

First things first: What could the cost of the transition to a green economy look
like? Near-term, enhanced regulation would probably strengthen headwinds for U.S.
economic growth, while perhaps the first half of 2022 would be the earliest investors
could anticipate any clean-focused infrastructure package, due to legislative obstacles.
In addition, a tax on emissions or a permit for them would be necessary to achieve
carbon neutrality by 2050, according to a strategy report by the National Academies of
Sciences, Engineering and Medicine, also a politically difficult hurdle.14

While the future seems bright for lithium – demand is expected to outstrip supply by
almost 228,000 tons by 2025, according to Benchmark Mineral Intelligence – prices
remain too low to spur extraction projects, according to a report by Reuters, citing
industry leaders. Global supply shortfalls could raise the cost of EV vehicles for consumers,
among other effects, slowing “green adoption,” in our view. In the case of Argentina, lots
of its lithium is in areas difficult to access. To boost supply, energy and infrastructure will
be needed, as well as time.15 We think these dynamics may well help sustain the relevance
of “brown” commodities in the investment landscape for a bit longer.

There’s also the potential environmental cost of extraction. Among other examples,
across the Lithium Triangle, debate centers on whether the excessive pumping of brine
water from underground is affecting nearby fresh-water reserves and local communities
and wildlife, such as large flamingo populations that reside in areas there. The bottom
line: investors and policymakers may need to weigh the net benefit of the full lifecycle of
green metals in decarbonizing the planet, a complex undertaking.

LatAm remains the most impacted region by the coronavirus pandemic, with our
economists expecting a recovery in real GDP of 4.1% this year, after a decline of -6.9%
in 2020. We think a slow inoculation drive may drag on economic performance and public
revenues. Elections in Argentina, Chile, Mexico and Peru, among other countries, may also
raise political uncertainty, dampening long-term investment. In sum: for the region as a
whole, precarious macroeconomic conditions may persist.

Among other examples, dogging Argentina are capital controls and delicate talks with
the International Monetary Fund (IMF) to restructure financial-relief packages, seen as
an important contributor for longer-term macroeconomic stability.16 Fence-sitting may
jeopardize up to $1 billion in lithium investment.17 The country also struggles with lacking
synergy between provincial and national government policy.18 Chile’s legislative code may

12
Ibid
13
Chile's lithium – blessing or curse? – DW Akademie (May 11, 2018)
14
Experts Tell Biden: Your Climate Goals Require a Carbon Price – Bloomberg (February 4, 2021)
15
Argentina eyes lithium expansion, but hurdles may dampen ambitions – Buenos Aires Times (December 12, 2020)
16
Argentina creditor group slams 'erratic' economic policy, warns on IMF deal delays – Reuters (February 17, 2021)
17
Argentina hints at incentives for lithium investment – Argus News (November 16, 2020)
18
Ibid

4 of 7  March 2021 – LatAm Insights

be outdated, in our view.19 Uncertainty there stems from the constitutional rewrite set to
take place, which will take time. In Bolivia, which has dreamed of lithium riches for over a
decade, the state remains an important player, one that in the past has battled with private
business, similar to Argentina.20,21 Optimistically, President Arce may be more receptive to
partnerships with foreign enterprises, a dynamic to monitor, in our view.22

Another factor is the role “green finance” may play. Used to fund projects with positive
environmental impact, green bonds made their debut in LatAm in 2014. We think their
use, largely dominated by corporates and in the transport and energy industries, may
increase. Institutional investor interest in environmental, social and governance (ESG)
factors has more than doubled, according to BofA Global Research’s Institutional Factor
Survey (see Exhibit 2).

Exhibit 2: Greater consideration for ESG opportunities may translate to a premium

for green bonds, benefitting clean industries in LatAm.
% of respondents using ESG
45
40
35
30
25
20
15
10
5
0
2017 2018 2019 2020

Source: BofA Global Research. Data as of February 2, 2021.

In Conclusion
Our neutral tactical weight for international equities considers a balance of dynamics
and developments. Among these, we remain cautious about the path of the coronavirus
and the increased likelihood of slow inoculation drives in certain regions such as LatAm,
where sluggish national economic rebounds and precarious macroeconomic and political
environments may persist. However, in other areas, the prospects for normalizing
economic activity are better – either the coronavirus has been relatively well-contained
and/or vaccination efforts are expected to be more expeditious.

Meanwhile, fiscal and monetary stimulus is anticipated to generally continue, factoring

into our more balanced view of Growth and higher-quality cyclical Value segments of the
equity market. This environment may also be more positive for raw materials overall, if
one also considers the potential for rising longer-term expectations for a depreciation of
the U.S. dollar and a more inflationary environment. Vows to achieve climate-neutrality
by many countries, plus the U.S. rejoining the Paris Climate Accords, highlight the need
for the green commodities required to tackle these ambitious goals.

Aggressive-minded investors with a long-term time horizon may ultimately see these
developments as playing to the strengths of LatAm, with its opulent endowment of
natural resources.

19
Ibid
20
The Lithium Triangle: Where Chile, Argentina, and Bolivia Meet – Harvard International Review (January 15, 2020)
21
Just when you thought it was safe – The Economist (May 5, 2012)
22
Ibid

5 of 7  March 2021 – LatAm Insights

MARKETS IN REVIEW
Equities – MSCI Indices Fixed Income
Total Return in USD (%) Yield (%)
Price Level QTD YTD 1 Year Dec. 31, Prior One
LatAm 2306.2 -5.3 -5.3 40.9 Levels (%) Current 2020 Year-end year ago
Brazil 1659.6 -10.6 -10.6 38.5 Brazilian 10-yr 8.68 6.91 6.91 8.62
Mexico 4741.7 3.9 3.9 42.2 Mexican 10-yr 6.39 5.55 5.55 7.77
Colombia 471.6 -11.6 -11.6 36.0 Colombian 10-yr 6.39 5.39 5.39 7.64
Chile 1391.4 16.8 16.8 56.8 Chilean 10-yr 3.10 2.65 2.65 2.93
Peru 1529.3 0.9 0.9 45.4 Peruvian 10-yr 4.70 3.51 3.51 4.13
EM Asia 748.2 5.1 5.1 58.5 Returns (%) – Non-Local Currency-based
EM EMEA 260.4 9.0 9.0 43.8 QTD YTD 1 Year
EM Aggregate 1348.2 4.6 4.6 56.0 EM Debt -3.0 -3.0 8.4
Int’l Developed Markets 2219.3 3.7 3.7 52.0 EM Sovereign -4.8 -4.8 9.6
Europe 140.3 4.0 4.0 57.3 EM Corporate -1.8 -1.8 8.6
S&P 500 (not MSCI) 3943.3 5.3 5.3 61.8
Commodities
Currencies Total Return in USD (%)
Levels per USD Price Level QTD YTD 1 Year
Dec. 31, Prior One Aluminum 2145.75 8.8 8.8 24.6
Current 2020 Year-end year ago Copper 414.55 17.6 17.6 64.1
Brazilian Real 5.56 5.20 5.20 4.80 WTI Crude 65.61 35.9 35.9 28.2
Mexican Peso 20.69 19.91 19.91 21.94 Brent Crude 69.22 34.4 34.4 70.1
Colombian Peso 3568.25 3429.73 3429.73 3951.57 Gold 1719.80 -9.4 -9.4 5.0
Chilean Peso 721.74 711.78 711.78 853.83 Source: Bloomberg; Chief Investment Office. Data as of March 12, 2021.
Peruvian Sol 3.71 3.62 3.62 3.53 Past performance is no guarantee of future results. Performance during periods
of exceptional market conditions should not be expected to be repeated in a normal
market environment. Performance results are extremely short term and do not provide
an adequate basis for evaluating performance potential over varying market conditions or
ECONOMIC & MARKET FORECASTS economic cycles. Investment results may have been different had another time period been
chosen for this example.
BofA Global Research Forecasts
Real GDP growth, (%) Consumer Price Inflation*, (%) Short term interest rates*, (%)
2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E
LatAm -6.9 4.1 2.7 3.3 4.0 3.4 --- --- ---
Brazil -4.1 3.0 3.0 4.5 4.6 3.5 2.00 4.00 5.25
Mexico -8.5 3.0 2.0 3.2 4.5 3.9 4.25 3.75 3.75
Argentina -10.0 6.0 2.7 36.1 46.0 37.3 40.00 35.00 36.00
Colombia -6.9 5.0 3.0 1.6 2.8 3.1 1.75 1.75 2.75
Chile -6.0 5.0 3.1 3.0 3.4 3.1 0.50 1.75 3.00
Global -3.2 5.6 4.5 2.6 3.0 2.9 2.21 2.24 2.35
U.S. -3.5 6.5 5.0 1.2 2.7 2.2 0.13 0.13 0.13
Emerging Markets -1.8 6.3 4.6 4.0 3.4 3.4 3.91 3.93 4.08
* Central bank target rate, year-end where available, short-term rates elsewhere. Data as of March 11, 2021.
It is not possible to invest in an index. Please note that there are limitations when viewing short-term performance results. This short-term performance may not be achieved over longer time periods.
Economic or financial forecasts are inherently limited and should not be relied on as indicators of future investment performance.

LATAM IN BRIEF
Brazil—Real GDP is expected to rebound by 3.0% this year, after contracting by
-4.1% last year. A neutral recommendation for Brazil’s local equity market balances
expectations for accelerating earnings growth, offset by the prospect of rising
political uncertainty. Above-target inflation is expected to peak by May at roughly
7%, afterwards dragged down by a large labor and services output gap plus easing
fiscal stimulus. The central bank is expected to raise its policy interest rate by
March. Key to the outlook are the path of the coronavirus, respecting the country’s
fiscal rule, restarting reforms, and external conditions.
Colombia—Despite recent restrictions due to a strong second wave of the coronavirus,
a bounce back in real GDP of 5% this year is expected to follow an annual contraction
of -7% last year. In addition to the base effect, expected to play a supporting role are
easy local monetary policy, favorable business sentiment, and migration from Venezuela
expanding the labor supply. Together with an increase in the public debt, the country
stands to lose its investment grade status if there is a prolonged delay in the passage
of tax reform to raise revenues, which is expected by mid-2021. Limited buy-rated
names means no exposure to the country’s equity market.

Mexico—Real GDP growth of only 3.0% is expected this year, after a contraction
of -8.5% last year. Elevated coronavirus cases should weigh on consumption, while
austerity and uncertainty are likely to characterize government policy, dragging on
investment. Inflation is likely to remain elevated, supported by rising minimum wages
and moves to limit the private sector from outsourcing, among other factors. A more
dovish Banxico may also underpin rising inflation expectations. However, the balance
of risks is to the upside. Benefitting exports and remittances, the potential for positive
spillover effects from U.S. economic growth and reshoring over the longer term
underscore our overweight recommendation for the country’s local equity market.
Chile—After a contraction of -6.0% last year in real GDP, our economists have revised
higher their expectation for this year to 5.0% growth from 3.3% earlier. While higher
coronavirus cases may drag on 1Q growth, underpinning a positive longer-term
trajectory are 1) resilient consumption, 2) follow through on the country’s vaccination
plan, 3) higher copper prices, and 4) fiscal capacity to support activity. A gradual hiking
cycle is expected to begin in 2H21. However, the process of rewriting the Constitution
is ongoing (and expected to conclude around mid-2022), while a presidential election
is set to take place in November. Uncertainty generated in part by these events
underscores a “neutral” local equity market recommendation.

6 of 7  March 2021 – LatAm Insights Past performance is no guarantee of future results.

Index Definitions
Securities indexes assume reinvestment of all distributions and interest payments. Indexes are unmanaged and do not take into account fees or expenses. It is not possible to invest
directly in an index.
Indexes are all based in dollars.
Argentina Merval Index: A basket weighted index, is the market value of a stock portfolio, selected according to participation in the Buenos Aires Stock Exchange, number of transactions of the past six
months and trading value. The index has a base value of $0.01 as of June 30, 1986. The index is revised every three months, taking into account the trading volumes over the past six months.
Bloomberg Commodity Index: The Bloomberg Commodity Index reflects commodity futures price movements. It is a financial benchmark designed to provide liquid and diversified exposure
to physical commodities via futures contracts. The index rebalances annually weighted two-thirds by trading volume and one-third by world production and weight-caps are applied at the
commodity, sector and group level for diversification. Roll period typically occurs from 6th-10th business day based on the roll schedule..
MSCI Latin America Index: The MSCI EM Latin America Index is a free-float weighted equity index covering the region. It was developed with a base value of 100 as of December 31 1987.
MSCI Brazil Index: The MSCI Brazil Index is a free-float weighted equity index covering the country. It was developed with a base value of 100 as of December 31, 1987.
MSCI Mexico Index: The MSCI Mexico Index is a free-float weighted equity index covering the country. It was developed with a base value of 100 as of December 31 1987.
MSCI Colombia Index: The MSCI Colombia Index is a free-float weighted equity index covering the country. It was developed with a base value of 100 as of December 31 1992.
MSCI Chile Index: The MSCI Chile Index is a free-float weighted equity index covering the country. It was developed with a base value of 100 as of December 31 1987.
MSCI Peru Index: The MSCI Peru Index is a free-float weighted equity index covering the country. It was developed with a base value of 100 as of December 31 1992.
MSCI EM Asia Index: The MSCI EM Asia Index is a free-float weighted equity index covering EM Asia. It was developed with a base value of 100 as of December 31, 1987.
MSCI EM EMEA Index: The MSCI Emerging Europe, Middle East and Africa Index is a free-float weighted equity index. The index was developed with a base value of 100 and a base date of December 31
of 1998.
EM Aggregate: The MSCI Emerging Markets Index is a free-float weighted equity index that captures large and mid cap representation across Emerging Markets (EM) countries. The index
covers approximately 85% of the free float-adjusted market capitalization in each country.
Int’l Developed Markets: The MSCI World ex USA Index is a free-float weighted equity index covering international developed markets. It was developed with a base value of 100 as of
December 31, 1969.
S&P 500: Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in
the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941-43 base period.
MSCI Europe Index: The MSCI Europe Index is a free-float weighted equity index designed to measure the equity market performance of the developed markets in Europe. It was developed
with a base value of 100 as December 31, 1998.

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7 of 7  March 2021 – LatAm Insights