The prospect of interest rate cuts by the US Federal Reserve creates favorable conditions for Latin American stocks.
The prospect of interest rate cuts by the US Federal Reserve is creating favorable conditions for Latin American stocks, and historical data shows that easing cycles during a "soft landing" of the economy typically lift the region's markets.
BofA Global Research expects the Fed to cut rates by 25 basis points in September and December, and then by another 75 basis points next year, resulting in a final rate in the range of 3%-3.25%.
"The Fed rate cut is coming. This is good news for Latin American stocks," the broker noted, emphasizing that most gains historically occur in the months leading up to the first cut.
Past results underscore the significance of the Fed's stance. Over the past 40 years, every 100 basis point Fed rate cut during "soft landings" yielded an average return of 11% for Brazil's Ibovespa and a 3% decline for Mexico's Mexbol, compared with 23% for the S&P 500 and 7% for emerging markets.
In contrast, when easing occurred during "hard landings," returns turned negative: Ibovespa fell 2%, Mexbol rose 11%, the S&P remained unchanged, and emerging markets rose 1%. In crash or credit event scenarios, the declines were sharper: Ibovespa fell 33%, Mexbol fell 58%, the S&P declined 13%, and emerging markets lost 29%.
The current cycle has shown mixed results since the peak of US short-term rates in May 2024. In dollar terms, Ibov fell 3%, Mexbol rose 4%, while emerging markets and the S&P rose 7% and 8%, respectively.
Analysts caution that local factors remain decisive for Brazil and Mexico, as they have in previous cycles, with commodity trends and currency movements shaping the results.
Timing is also crucial. Latin American stocks tend to rise in the three months leading up to the first Fed rate cut. On average, Ibov rose 8% and Mexbol 13% during this period, compared to 6% for the S&P and 3% for emerging markets.
After the rate cuts began, the models diverge. Three months after the first cut, in the "soft landing" scenarios, the S&P rose on average 4%, Ibov 23%, but Mexbol fell 6%, and Latin America as a whole declined 7%. Six months later, the S&P is up 9%, Ibov is up 9%, while Mexbol is down 1%, and Latin America is down 1%.
"History suggests that the S&P rally could start even sooner (within six months of the first rate cut, as US short-term rates may peak during this period)," the broker noted.
The outlook is also influenced by a wave of global policy easing. BofA noted that 91% of central banks are cutting rates, supporting growth expectations.
In Latin America, Brazil is forecast to cut rates by 325 basis points next year, followed by Colombia with 175 basis points, Mexico with 100, Peru with 50, and Chile with 25.
Analysts said fiscal restraint in Brazil and constitutional reforms in Mexico add uncertainty, but the broader trend remains constructive. "The world is cutting rates while the earnings outlook is improving," the broker said, pointing to synchronized easing and stronger earnings as boosting factors for Latin American assets.