“If he were a weatherman, International Monetary Fund economist André Meier said his economic forecast for Latin America would be 'cloudy with a chance of rain.'
Just four years ago, average economic growth in Latin America was 6.5 percent and self-confidence also peaked in 2010 as regional economies quickly rebounded from the effects of the global financial crisis, said Meier, a deputy division chief at the IMF’s Western Hemisphere Department. At the time, he said, many Latin American countries seemed to have 'overcome the curse of being emerging markets.' But since then, Meier said confidence has eroded and Latin America is facing a number of challenges. The IMF is projecting growth of 2.5 percent this year for Latin America and the Caribbean and slightly better performance in 2015.
Among the challenges, said Meier, are slowing investment rates, lower commodity prices, tighter financial conditions, too much red tape that is negatively impacting the business climate and congested ports and other supply bottlenecks in some countries.”
Low-gear growth predicted for Latin America
Miami Herald
June 20th, 2014
Introduction
The iShares S&P Latin America 40 Index ETF (ILF) is one way to participate in these markets. According to iShares, the investment seeks to track the investment results of an index composed of 40 of the largest Latin American equities. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It seeks to track the investment results of the S&P Latin America 40TM, which is comprised of selected equities trading on the exchanges of five Latin American countries.
Chart 1 below breaks the geographic exposure down, country by country.
IEF Resuming Its 2014 Uptrend…
Chart 2 below plots ILF daily since January along with its 200-day moving average, a widely watched major trend proxy. The green highlights show that, contrary to André Meier’s “cloudy and rainy” economic expectation for the region, the ETF broke out higher yesterday from 2 months of sideways price congestion, indicating temporary investor indecision, to resume its larger February advance.
This pattern and breakout targets at least an additional 4% rise to 41.60 that will remain valid as long as the apex of the triangular “indecision area” at 39.05 contains on the downside as underlying support.
…While Breaking Its 4-Year Cyclical Downtrend
Chart 3 takes a bigger picture look at ILF, weekly since 2010, and shows that in addition to breaking out higher from 2 months of sideways congestion this week, the ETF has also recently risen above its April 2011 cyclical downtrend line. This, in addition to its current position above its 52-week moving average, indicates that a new major uptrend in IEF is underway.
Moreover, a closer look at the chart shows that an upcoming rise to 41.60, as suggested by Chart 2, would position ILF above its next significant level of overhead resistance at the 40.78 October 2013 benchmark high. Should this occur, it would help to further confirm what appears to be an emerging major uptrend in the ETF and would clear the way for an additional 13% rise to the next significant overhead resistance level at 46.00, the January 2013 benchmark high.
Relative Performance
The blue line in the upper panel of Chart 4 below plots the daily relative performance of IEF versus the S&P 500 SPDR ETF (SPY) since 2010, with IEF plotted by itself in the lower panel. The chart shows that, despite the recent strength in the Latin American ETF, it still remains in the midst of an almost-4-year trend of relative underperformance versus the U.S. broad market.
However, a closer look at the chart also shows that IEF has actually outperformed SPY by 15% since March as it approaches the 2010 trend of underperformance as defined by the red line in the upper panel.
We will be watching this chart closely in the weeks ahead as a significant and sustained rise by the blue relative performance line, above the red line, would suggest that a more sustainable trend of relative outperformance by Latin America may be emerging. Conversely, a failed attempt to rise above this line would indicate that the current trend of relative underperformance is still intact and may be resuming.
Correlation to the U.S. Market
Table 1 below shows that IEF and SPY have not been positively correlated to one another over the past 13 years, and rather that their relationship over the past 13 years appears to have been quite random.
This table speaks to the viability of Latin American equities, as represented by ILF, as a potential means to manage portfolio risk via diversification.
Conclusion, Investment Implications, Strategy
The iShares S&P Latin America 40 Index ETF (ILF) broke out higher from 2 months of sideways price congestion, which suggests that its larger 2014 advance has resumed and targets at least an additional 4% rise to 41.60 that will remain valid above 39.05.
This sets up an initial 2:1 risk/reward ratio in the ETF that has the potential to greatly improve over time, because: 1) ILF has recently risen above its April 2011 cyclical downtrend line, and 2) a rise to meet its 41.60 initial target would potentially clear the way for an additional 13% rise to 46.00.
Finally, because ILF has been statistically uncorrelated to the S&P 500 SPDR ETF (SPY) over the past 13 years, and has already outperformed SPY by 15% since March, we view this Latin American ETF as being worthy of consideration as a means to both diversify portfolio risk and to potentially enhance performance.
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