Morgan Stanley sees emerging catalysts across Latin America

Investing.com -- Morgan Stanley said catalysts are starting to emerge across Latin America as global investor positioning in emerging markets remains low relative to recent history. Global investor positioning in emerging markets fell by about 21 basis points in May but appears to be recovering.

The bank said inflation volatility and debate over Federal Reserve policy direction keeps emerging markets in limbo. Morgan Stanley expects no rate hikes in 2026, contrary to market expectations.

In Brazil, Morgan Stanley said lower inflation and a slowing late-cycle economy could support lower interest rates. The bank maintains an overweight rating on Brazilian equities, noting that lower rates will be important for reducing fiscal dominance risk and enabling a shift from government-led growth toward investment and exports.

Brazilian inflation has become more benign, mirroring the recent US trend. Polling in Brazil has become more balanced, with markets pricing the probability of a policy shift at roughly 50/50. Recent surveys show increasing support for opposition candidates ahead of the October 2026 elections.

Brazil currently trades at 8.5 times price-to-earnings ratio, about one standard deviation below its historical average. The positioning for Latin America, Brazil, Mexico and Chile among global emerging market funds is among the lowest relative to recent history. Brazil's overweight position stood at 1.7% in May, down from 2.1% in April and a peak of 2.3% in March.

In Mexico, investment shows early signs of inflection, with the IT Hardware sector continuing to show strong momentum. Infrastructure investment appears to be bottoming, though domestic consumption remains subdued. Morgan Stanley maintains an equal weight stance but is increasing its positive risk bias toward investment-related names.

Mexico trades 0.7 standard deviations below its historical average after mostly recovering from its 2025 lows. Foreign investors have stopped net outflows from the market in recent months.

Morgan Stanley raised its hyperscaler capital expenditure estimates substantially, now modeling about $1.2 trillion and $1.4 trillion of capex in 2027 and 2028 across five primary companies tracked.

The bank said it is turning more constructive on Argentina's domestic exposure ahead of a potential earnings acceleration in 2027. Policy transitions in Chile and Argentina are translating into investment activity in copper, ports, water infrastructure and electricity.

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