We examined the 3-year performance of dollar-denominated ETFs of LatAm´s major equity indexes. Spoiler: It looks ugly.
We use the following ETFs per country:
- Argentina = ARGT
- Brazil = EWZ
- Chile = ECH
- Colombia = ICOL
- Mexico = EWW
- Peru = EPU
- US (S&P) = SPY
Except for Argentina, all major LatAm equities had a terrible performance during the 3-year period from Jan. 2013 to Jan. 2016. The largest impact on dollar return for equities came from currency depreciation. However, local return on equities was also massively negative for the period.
The sole strong performer was Argentina, which observed a stunning 82.2% USD return for the period at a pace of 22.1% each year. This came despite having the largest currency depreciation in our LatAm sample (64%). Argentina was an outlier for the period, as it went through a consistent recovery in equities from heavy discounted valuation and a compression in country risk spread.
For the rest of our LatAm sample, declines were the norm and ranged from -38.3% for Mexico to -67.9% for Brazil, which was the worst performer. Markets in Chile, Colombia and Peru also suffered, with USD returns within a range of -53% to -59%.
Brazilian equities showed the greatest negative impact from currency depreciation as the Brazilian Real (BRL) declined 51% in value vs the dollar. The opposite case happened to the Peruvian Sol, which depreciated the less within our LatAm currency sample.
Simply put, for every dollar invested in the period, we would have received each year a 22.1% return if we invested in the MERVAL (ARGT), 7.8% if invested in the S&P 500 (SPY) and -14.9% if invested in the MEXBOL (EWW).
The worst performers in local currency were Peruvian equities. Brazilian, Colombian and Chilean stocks declined in similar levels of around 30%. Mexico was slightly more defensive with a 3-year return of -11.3%.
LatAm USD Index ETFs proved null defensive compared to the S&P 500, which made several new highs during the period. Most LatAm indexes started a constant slide since mid-2014 and currently remain at 3-year lows.
In terms of volatility, the highest came in Brazil (35.7%) and Colombia (32.2%). Both were above the S&P’s volatility (16.2%) with 19.5% and 16.1% figures, respectively. Both Brazil and Colombia showed a significant higher volatility compared to Argentina. Mexico, Chile and Peru traded at very similar levels of volatility of around 20%.
During 2014 volatility increased significantly in Brazil and Colombia and declined in Chile, Mexico and Peru. In August 2015 volatility increased sharply and simultaneously for all of our sample, including the S&P 500. The upward move was maintained and continued its uptrend.
In terms of trading volume, Brazil’s still remains the largest among LatAm peers, followed by Mexico. Trading volume remained relatively constant for the period across LatAm indexes, except for a temporal hike in Brazil’s volume from mid-2014 to mid-2015.
LATAM PM´s take:
- Diversification across regions, currency and assets makes sense looking at the poor performance of the region (excluding Argentina) in the last three years.
- A long-short strategy would have been an excellent play for the period.
- It is extremely important from a local investor’s standpoint to secure access to instruments with exposure to USD or other strong currencies.