Brazil in pole position in South American wallets
Oil is an asset for many Latin American countries, such as Brazil, Mexico and Colombia, and supports the stock exchanges, provided the war lasts a short time
Key points
South America is among the emerging geographical areas that have performed best on the stock exchange since the beginning of the year. The performance is 6.5% and contends for the lead among emerging markets with Asia. Since the attack on Iran by the US and Israel, however, the Msci Latin America index has given back about half the gain and has lost more than 5 per cent in twenty days.
On the markets, the South American agglomeration is made up of countries that are very heterogeneous in terms of GDP composition and political situation. Relations with the United States are an important factor for the economy, although the tariffs issue has been overshadowed by the war chronicles.
Tariffs in the background
Marco Piersimoni, co-head of multi-asset euro at Pictet Asset Management, explains that the war in the Middle East has significantly altered investors' focus. Thus, the issue of tariffs has lost relevance and the macroeconomic and financial impacts of the energy shock have become much more important. The dollar variable itself is a consequence of the shock. In addition, the US Supreme Court ruling invalidated a significant part of the Trump administration's tariffs framework. 'For some countries in particular,' Piersimoni points out, 'the immediate reduction of tariffs is very significant. For example, for Brazil the rate went from 25 per cent to 10 per cent'.
The Crude Factor
Oil is a rich resource for many Latin American states, making them more energy self-sufficient and less vulnerable to possible increases in the value of the dollar, which is the commodity exchange currency. 'Brazil, Mexico, Colombia and other Latin American countries,' Piersimoni continues, 'produce a total of around 8 million barrels of oil per day, a surplus compared to domestic consumption, which allows for the export of oil. This ensures that the terms of trade of these countries do not deteriorate and makes the currency adjustment against the dollar less painful'.
Net oil-exporting South American countries such as Brazil and Colombia could benefit from higher crude oil prices and a consequent increase in export earnings. At the same time, net energy importers in the rest of the region and Europe will see a worsening of trading conditions, which will weigh on equity prospects.
