Caruso-Cabrera: The investing tailwinds for Latin America are the best in decades

Latin American equities, measured by the iShares Latin America 40 ETF, are up 15% year to date versus an 11% gain for the S&P 500 and more than 70% since late 2024. Citi sees the best conditions for higher regional growth in decades, supported by a weaker dollar, strong commodity prices, high real rates and pro-market political shifts; Brazil's carry can reach 10%. Risks include further U.S. rate increases, El Nino-related agricultural disruption and already-richer valuations, making earnings delivery essential for continued gains. Brazil ETF EWZ is up 18% YTD, while Nu Holdings has a Morgan Stanley overweight rating and $21 target versus a share price below $14.

Analysis

The regional beta trade is increasingly a Brazil/FX-duration trade rather than a diversified Latin America growth allocation: ILF and EWZ are dominated by Brazilian financials, energy and materials, making further upside highly dependent on BRL stability, local easing and commodity prices rather than broad regional reform. A declining Brazilian policy rate can support ITUB's loan growth and valuation multiple, but net-interest-margin compression will arrive before volume growth; the cleaner expression is likely high-quality deposit franchises over broad bank beta. NU has the greatest operating leverage to lower funding costs and credit penetration, although its U.S. expansion should be treated as a medium-term investment spend and potential multiple risk, not an immediate earnings catalyst.

The next several weeks are dominated by Brazil's election risk. A market-friendly outcome could compress Brazil's equity-risk premium and extend EWZ/ITUB upside over 1-3 months, but a reversal in polling can rapidly weaken BRL, lift the local curve and erase gains in domestic financials. VALE is a weaker way to express the thesis: it needs Chinese steel demand and iron-ore discipline, so its earnings path is less connected to the regional capital-flow narrative and more exposed to a China downside.

Consensus may be underestimating the reflexivity of foreign flows into a relatively shallow market, but is also extrapolating a favorable dollar/liquidity regime after a >70% regional run. The decisive 6-18 month question is whether lower rates translate into private-credit growth without a deterioration in consumer delinquency; this is especially important for NU. The thesis fails if U.S. real yields resume rising, BRL breaks down alongside a steeper Brazilian curve, or bank guidance signals credit-cost inflation rather than operating leverage.

Key Decisions for Investors

• Initiate a 1-3 month long ITUB / short VALE pair around the Brazilian election: ITUB offers direct exposure to rate-cut-driven credit expansion and potential risk-premium compression, while VALE removes China-sensitive commodity beta. Target 10-15% relative upside; exit on a material BRL selloff or a Brazilian curve selloff following election polling.
• Use EWZ call spreads, not outright ETF exposure, for election-event upside: buy 1-2 month modestly out-of-the-money calls and sell higher-strike calls to cap post-election volatility decay. Size for a maximum premium loss; the trade is invalidated by polling deterioration or a hawkish fiscal/rates repricing.
• Maintain NU as a 6-18 month structural long only if quarterly disclosures show stable delinquency/vintage performance while funding costs decline. The risk/reward is attractive versus mature banks if loan growth accelerates without higher provisions; reduce if credit-loss ratios rise or U.S. expansion materially lifts operating-expense guidance.
• Do not chase broad ILF after the sharp rerating. Set a watch trigger for a pullback driven by global-rate volatility rather than local earnings deterioration; renewed long exposure is more attractive if BRL stabilizes and earnings revisions for Brazilian financials turn positive.