The Missing Piece in Latin America’s Bull Case

Nikolaj Lippmann (0:00)

Welcome to Thoughts on the Market. I'm Nik Lippmann, Morgan Stanley's Chief Latin American Equity Strategist. Today, where Brazil could be the missing piece of what we call that time spring, and what AI has to do with it.

It's Thursday, October 15th at 10 a.m. in New York.

Brazilian equities rallied sharply last week after surprising first round presidential election results. Flávio Bolsonaro finished ahead of President Lula, setting up a runoff later this month. The outcome remains uncertain, but for investors, I think there's a bigger question. Can Brazil approach a policy shift that unlike something the country has lacked for years? Investment. We've long argued that Latin America is moving from a consumption led economy towards an investment led cycle, thanks to one change in geopolitics, two investment friendly policies, and three the potential for low interest rates. What's more, this fits into the framework of the AI capex cycle driving the global and especially the US economy that has moved from consumption to capex as argued by Mike Gapen or US economists. We already see signs of this last spring in Argentina, Chile, Peru and Colombia. Brazil could be the largest missing piece, and there are three reasons why. First, the cost of capital. Brazil remains one of the world's most expensive places to invest. High government debt and elevated interest rates have made fixed-income investment more attractive than equities or entrepreneurial risk-shaking. But credible fiscal reform could change that equation. Lower government spending could reduce borrowing costs, strengthen the currency and encourage private investment, which means capital could shift from sitting in fixed-income assets toward funding growth. Second, AI. AI might seem unrelated to Brazilian politics, but we see an important connection. Our global framework suggests that annual capital spending could rise from roughly $2.5 trillion to about $5-$6 trillion as companies build out global AI infrastructure. And Latin America has a critical role to play. Data doesn't need electricity. Electricity requires energy infrastructure, and the infrastructure requires copper, lithium, and other critical minerals.

Latin America as a whole surprised roughly 10% of the world's energy, holds about 20% of global energy reserves, about 30% of global copper, and approximately 60% of the world's lithium resources.

So we have argued that Brazil and Argentina look increasingly like Texas, with exports of energy and of agriculture. And one other area around politics where Brazil could perhaps learn or be inspired from pure Latin American countries together some inspiration from Texas could be around deregulation.

For Brazil, lower interest rates and greater policy credibility could make participating in this investment boom considerably easier.

And that brings me to the third factor, geopolitics. Brazil has strengthened its economic ties with the East, while remaining deeply connected to Western capital markets and US technology. A more balanced relationship could improve access to capital markets and support long term investments. Of course, an election result alone doesn't guarantee change. Fiscal discipline, policy execution and global financing conditions remain critical. High US treasury yields are a particularly important risk for a region carrying substantial debt. But consider what's already happening elsewhere. Mexico contributes hardware to the AI supply chain. Chile is rebuilding its investment pipeline and Peru is benefiting from mining activity. Argentina is attracting capital after significant policy change. As Latin America's largest economy, Brazil could have substantial regional implication if it moves in the same direction. That's ultimately our last spring thesis, a shift away from consumption towards investment, entrepreneurship and capital formation. There's still a long road ahead, but Brazil could be the most important test of whether that spring truly takes hold.

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