Portfolio managers at CI GAM, T. Rowe Price say AI flows are starving Latin America of institutional EM capital, argue LATAM neglect creates opportunity
Each month at BPM, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're focusing on Emerging Markets and the sectors and countries within the asset class.
In a market cycle dominated by AI supply chains and semiconductor plays concentrated in Asia, Latin America – or LATAM - has slipped further down the priority list for institutional emerging market allocators.
According to Haider Ali, associate portfolio manager at T. Rowe Price, the region accounts for roughly 7 per cent of the MSCI Emerging Markets Index and that neglect is creating a disconnect between LATAM's economic weight and its index representation.
Ali acknowledged that while the AI supply chain - concentrated in Korea, Taiwan, and increasingly China, dominates EM allocations right now – he cautioned that the asset class has a habit of becoming synonymous with whatever theme is in vogue, highlighting how China once made up 42 per cent of the index. Now AI-related sectors carry similar weight, and index composition has shifted accordingly.
Additionally, the companies investors are rushing toward today were available at lower valuations two years ago, and he warned against treating EM as a single-theme trade.
Why LATAM has become forgotten among EM investors
"Right now, this matters, but what else can change? What else does matter? What's forgotten? Maybe LATAM is forgotten,” said Ali. “Do you think as an economy LATAM is not relevant? It is. It's just a thing of how indices and benchmarks are constructed.”
Matthew Strauss, senior vice-president and portfolio manager at CI GAM, agrees with Ali, emphasizing the AI trade has starved non-tech regions of capital flows almost by default.
"In the current world where everything is about AI or the broader AI, it's not just AI compute, but it's also AI infrastructure, the power, build out, storage, everything," he said. “If you are light in companies operating in that space, you are falling by the wayside almost just by default. And Latin America would be in that group at this point in time.”
Brazil remains overlooked for institutional capital
According to Ali, Brazil draws the most attention in the region, and the most skepticism. He pointed to its strength as an energy and resources exporter — sectors that stand to gain if the US dollar continues to weaken. He dismissed much of the political anxiety around election and reform risk as overblown, noting that Brazil has operated under a Lula government before without any fundamental disruption to the corporate sector, and that institutional checks on fiscal policy remain intact.
Strauss also identified Brazil as the most overlooked market, weighed down by an upcoming election and investor concern that a continuation of left-leaning governance would mean more of the same sluggish growth and weak market performance.
On the domestic side, Brazil's rate environment remains a constraint. The country had been on a path toward lower inflation and easing monetary policy, but the Gulf conflict and resulting energy price pressure stalled that trajectory. Ali sees the domestic financial and consumer segments as tied to rate relief. Once borrowing costs come down, those areas should respond.
“These are fairly deep economies with a good consumer background. And I think the one thing which is missing right now that we are perhaps need to pay closer attention to within EM is how these domestic consumptions economies grow,” said Ali.
Indonesia faces an MSCI Index reckoning
Strauss drew a parallel to Indonesia, another forgotten market that suffers not only from its lack of a tech sector but also from country-specific policy concerns that have compounded the neglect.
“Prabowo [Subianto], the new president, is pushing through policies which is negative for general market perception. There is also another factor that's overhanging the Indonesian market and that's the potential that they get kicked out of the MSCI Emerging Market Index,” said Strauss, noting MSCI raised concerns that free float figures reported by the Jakarta Stock Exchange for several companies may not reflect actual liquidity. He believes that’s a problem that strikes at institutional confidence.
While a decision was expected roughly a month ago, MSCI has since postponed it for another six months. Strauss reads that delay as a warning sign rather than a reprieve.
"I think is really a negative indication because MSCI doesn't want to be the one that gives the final negative stamp on a country," he said.
Pointing to Mexico, Ali described a consumption cycle that boomed over the past two to three years and is now cooling. Still, uncertainty around USMCA - whether it gets renewed annually rather than extended - hangs over the northern manufacturing corridor that had attracted a wave of new factory investment.
“There are companies that are chugging along and doing well. They have resources related to mining companies as well as the airports and infrastructure companies which are continuing to perform very well. It's just that the consumption side is a little bit weaker and that could be a cyclical slowdown. And once we get more clarity on USMCA and all the other related elements, then that should improve,” said Ali.
Chile and Peru, the underdogs of LATAM
For the smaller Andean economies, Strauss grouped Chile and Peru together, noting that both have undergone political shifts toward the economic right - a change that was especially meaningful for Chile after a period of sharp leftward policy that created market uncertainty.
Peru enters the picture because of its substantial and investable copper exposure, which mirrors Chile's. On copper itself, Strauss described it as the commodity he is most structurally bullish on over the longer term as he acknowledged some new production is coming online, but he expects demand to remain strong and supply to stay marginally short for several years - with a possible small surplus this year being the exception.
While the structural case for higher copper prices remains intact, the harder question is entry point. Strauss pointed out that the well-known copper producers, particularly on the Peruvian side, are not trading cheaply. He acknowledged strong companies with good operational profiles have already been recognized by the market, which means the underlying commodity thesis doesn’t always translate into an attractive equity position.
“It’s that old adage that a good company is not necessarily a good investment because it's already priced in and sometimes, we struggle with some of these copper names,” said Strauss. “We like the underlying copper story but are we getting it at the value that we are comfortable with?"
