- The war between Russia and Ukraine “has created a massive gap in critical materials,” says Bank of America.
- This leaves room for commodity-rich regions, such as Latin America, to increase prices and market share.
- Bank of America identified nine buy-rated stocks with exposure to Latin American commodities.
Commodities, usually classified as an alternative asset class, have finally gained a rare chance to shine.
According to Wall Street pundits, there are two main reasons to invest in commodities right now.
First, they have traditionally been a good hedge against inflation, making them excellent assets to diversify portfolios and hedge against. 40 year highs in consumer prices, said Hakan Kaya, senior portfolio manager at Neuberger Berman, in a recent podcast.
Second, the sanctions on Russia stemming from its invasion of ukraine they have created a gap in the production of raw materials that companies in other previously ignored nations will have to fill, said Ajay Singh, equity strategist at Bank of America.
“The ongoing invasion and resulting sanctions by the West and its allies create a gap in critical materials that the rest of the world will need to fill,” Kapur wrote in a March 21 note. He specifically pointed to commodity-rich countries like Australia, Indonesia, Malaysia, Qatar, Saudi Arabia, South Africa, and particularly several in Latin America.
Latin America is a key market for raw materials
Among those nations, Kapur singled out Latin America as the main beneficiary of a tighter commodity market thanks to the similarity between its exports and those of Russia and Ukraine.
“LatAm, as a global supplier of agricultural products and raw materials, is key to the new world trade order as supply from Russia is affected by sanctions and supply chain disruptions,” he wrote.
Specifically, the region supplies 55% of world exports of crude soybean oil, 42% of lead ore, 25% of copper, 33% of corn, and a significant amount of products such as fish, barley, wheat, wood, orange juice and others. precious metal ores.
The region’s underperformance in recent years also presents an opportunity for investors, Kapur said. He noted that, in recent years, factors such as recessions, political uncertainty, and the impact of COVID have resulted in poor growth. As a result, Latin American stocks have missed out on a more than 150% surge in commodity prices since March 2020, according to Kapur.
As concerns over COVID-19 continue to fade and ease pressure on economies around the world, particularly China’s, Kapur is optimistic it is time for “a new cycle of growth” to emerge in the Latin American market. . He also pointed out that Latin American stocks collectively rose 203% on average in the last three episodes of commodity price booms since 1999.
brazil stands out
Within the region, not all nations are the same, said Kapur, who warned that in the short term, countries that import oil will suffer, while countries that export oil and food, both relatively inelastic goods, will be the main beneficiaries. In particular, he singled out Brazil as his favorite market in the region due to its unique combination of macroeconomic factors.
In addition to the obvious boost in Brazil’s trade from a surge in commodity prices, Kapur wrote that the “big commodity and liquid names” in Brazilian stock indices would benefit from foreign investment flowing into investment strategies. value and raw materials.
Furthermore, Brazil alone is responsible for 22% of all the world’s iron ore exports and the country “has almost no direct exposure to Russia in trade terms,” Kapur said. Brazil is also ahead of the US and other nations in the rate hike cycle, he added, “and in the past, a Fed hike hasn’t stopped Brazilian stocks from rising in light of other positive drivers,” since most of the countries rich in raw materials the countries have a good performance in the first year of hikes.
Despite the positive outlook for commodities, Kapur warned that Latin America still faces the risks of higher inflationary pressures, especially as they are currently aggravating at a critical time when inflation in the region is already high. These pressures, he continued, could negatively alter “social cohesion” in the community, especially as elections in Brazil and Colombia approach, and he also cited his fears of possible “policy errors” by central banks as another risk for the region.
Buy-rated stocks with exposure to Latin American commodities
To follow the previous investment thesis, Kapur and his team identified nine buy-rated stocks with exposure to Latin American commodities, most of them headquartered in Brazil. Those stocks are shown below, along with each company’s ticker, specific commodity exposure, market capitalization and analyst comments.