Moneycontrol Pro Panorama | LatAm’s posing risks for Corporate India, investors should watch closely  

LatAm can have an influential role on corporate earnings and in financial markets, and investors would do well to keep a close tab on the region.

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Latin America (LatAm) may be distant from India but strengthening trade links means the region’s influence over financial markets is rising. The region is resource rich and exports large quantities of industrial raw materials and agricultural commodities. Any disruption to production, exports or shipments rattle commodity markets and in turn their industrial buyers and eventually consumers.

Another source of risk is economic instability. Countries in this region tend to overspend, warranting regular bailouts. Politicians offering to fix the broken system are voted into the government. But once in power these very politicians struggle to deliver on bitter reforms. The cycle seems to be repeating now.

“With a strengthening dollar and rising interest rates, LatAm is undergoing what Asia suffered in the 1997 SE Asian currency crisis. Servicing (paying interest) and repayment of dollar loans are becoming a Herculean task for LatAm nations,” writes Vijay L Bhambwani in today’s edition of his column. Do Read.

Pushed to the wall, politicians and executive resort to desperate measures to raise revenues, such as fire sale of mining materials or impose punitive taxes. This can pose risk to metal stocks, warns Bhambwani. Metal stocks have been one of the relatively better performing sectors on the NSE in the last six months thanks to stable profit margins and recovery in business volumes.

And metals is not the only sector whose fortunes are intertwined to the developments in Latin America. UPL, the largest crop protection products company by revenue, derives 41 percent of its revenue from Latin America. After what has been the most turbulent year (2023) for global agrochemicals industry in recent past, the recovery hopes are pinned on Latin America.

“Owing to the differences in region-wise cropping calendars, Latin America is probably the key region to monitor during H2 FY24, as it begins its cropping season with high inventories in its distribution channel,” explain analysts at Kotak Institutional Equities. UPL’s revenue dropped by 18 percent in H1 FY24. The company posted a loss in the September 2023 quarter.

While excess inventories and price erosion are undermining the revenue of agrochemicals producers, hot weather and potential change in crop patterns are clouding the demand outlook.

What both instances show is that LatAm can have an influential role on corporate earnings and in financial markets, and investors would do well to keep a close tab on the region.

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R Sree RamMoneycontrol Pro