Why Fed cuts are good news for LatAm equities

BofA Global Research anticipates imminent Fed rate cuts, forecasting 25 basis points in September and December, followed by 75 basis points next year, which historically creates a favorable backdrop for Latin American equities during soft-landing easing cycles. While Brazil's Ibovespa has shown significant gains, particularly in the three months preceding the first Fed cut, Mexico's Mexbol performance has been more mixed post-cut, underscoring the importance of local drivers. This outlook is reinforced by global synchronized easing and an improving earnings environment, though fiscal constraints in Brazil and constitutional reforms in Mexico introduce specific uncertainties.

Analysis

According to BofA Global Research, an imminent Federal Reserve easing cycle, projected to start with a 25 basis point cut in September, presents a historically favorable environment for Latin American equities, contingent upon a U.S. soft landing. Historical data over 40 years indicates that for every 100 basis points of Fed cuts during soft landings, Brazil's Ibovespa returned an average of 11%, while Mexico's Mexbol declined 3%. This performance contrasts sharply with hard landings, where Mexbol rose 11% and Ibov fell 2%. Timing appears critical, as the majority of gains have historically occurred in the three months preceding the first cut, with Ibov and Mexbol rallying 8% and 13% respectively. Post-cut performance diverges, with the Ibovespa gaining 23% in the subsequent three months while the Mexbol fell 6%. The current market shows this divergence, with Ibov down 3% and Mexbol up 4% in dollar terms since U.S. rates peaked in May 2024. While a synchronized global easing cycle—with 91% of central banks cutting rates—and an improving earnings outlook provide a constructive backdrop, local drivers such as fiscal constraints in Brazil and constitutional reforms in Mexico are cited as decisive risk factors that could shape individual market outcomes.

Key Decisions for Investors

• Consider tactical, front-loaded positioning in Latin American equities, as historical data suggests the strongest performance for both Brazilian and Mexican markets occurs in the three months leading up to the first Fed rate cut.
• Investors should prepare for performance divergence post-cut, potentially holding or increasing exposure to Brazil's Ibovespa, which historically rallies further, while re-evaluating or trimming exposure to Mexico's Mexbol, which has shown a tendency to decline in the 3-6 months following the start of an easing cycle.
• Closely monitor local political and fiscal developments, specifically Brazil's fiscal policy and Mexico's constitutional reforms, as these country-specific factors are identified as having the potential to override the positive macro tailwind from global rate cuts.
• The entire investment thesis is contingent on a U.S. soft landing; investors must factor in the significant downside risk outlined by historical data, where a hard landing or credit event scenario led to average declines of 33% for Ibov and 58% for Mexbol.