Why does Citi believe Latin America offers its best investment conditions in decades—given the region’s equity outperformance versus the U.S., rising international capital inflows, a weaker U.S. dollar, strong commodity prices, high real interest rates and carry yields, favorable

Citi’s case is that an unusually favorable external backdrop is now reinforcing improved domestic policy credibility: a weaker dollar, high commodity prices, high real yields, capital inflows, and more market-friendly politics can support currencies, local bonds, equities, and eventually faster growth. But it is a qualified opportunity—not a guarantee—and depends on reforms, benign global liquidity, and corporate earnings delivering. 7

Why Citi sees a rare opening

• Latin American equities have outperformed: the iShares Latin America 40 ETF was up 15% year-to-date versus 11% for the S&P 500, and more than 70% from late 2024. 7
• A weaker U.S. dollar improves the region’s terms of trade, supports local currencies, raises the local-currency value of commodity revenues, and reduces the burden of dollar-denominated debt. Citi identifies it as the most important regional tailwind. 7
• Strong commodity prices benefit resource-rich economies and have already helped lift regional currencies and shares. 5
• High real interest rates offer unusually attractive carry—Citi cited carry as high as 10% in Brazil—which draws foreign money into local bonds and currencies. If inflation permits rate cuts later, falling discount rates could also support equities. 7
• The geopolitical case is comparatively constructive: closer U.S.–Latin America ties, supply-chain diversification, and elections that favor stable currencies, trade openness, and market-oriented policy may lower perceived political risk. 37

Colombia: a practical example

• Colombia shows how the macro and political stories can combine. Its peso reached its strongest level in more than five years in June, reflecting a supportive global risk environment and demand for local assets. 4
• Local-government debt had risen nearly 10% from late May by mid-July—the strongest performance in Latin America—as investors anticipated that the incoming president could improve public finances. 1
• The political catalyst was visible immediately after the first-round election: the peso recorded its largest jump in four years while Colombian bonds and stocks rose when right-wing candidate Abelardo de la Espriella emerged as the clear runoff favorite. 6
• A market-friendly government also helped revive corporate issuance: local corporate bond sales reached about 4 trillion pesos ($1.27 billion) in the first seven months of the year, alongside lower sovereign yields. 2

The investment logic is therefore not just coupon income: investors can potentially receive high carry, currency appreciation, and bond-price gains if fiscal credibility lowers risk premia. That outcome remains conditional on delivery of fiscal repair. 1

Brazil: return potential, but election-sensitive

• Brazil is central to the regional rotation because its market offers high real rates and carry, deep liquid asset markets, commodity exposure, and the prospect that eventual rate cuts could lift equity valuations. 7
• Yet the Brazilian real and equities are especially sensitive to presidential-election expectations. Citi has historically characterized the real as an “election currency,” meaning investors may hedge it or trade heightened pre-election volatility. 8
• The opportunity is a policy shift toward fiscal discipline and a more business-friendly framework; the risk is that an uncertain or adverse electoral outcome raises fiscal-risk premia, weakens the currency, and delays monetary easing. This is an inference from the documented election-currency risk rather than a confirmed forecast. 8

What could end or weaken the rally

• U.S. rates and the dollar: Further U.S. rate increases could pull capital back to dollar assets, strengthen the dollar, raise external financing stress, and unwind carry trades. Citi’s earlier strategy explicitly conditions attractiveness on broad global risk appetite. 7
• Climate and agriculture: Droughts and floods associated with El Niño can damage agriculture—particularly relevant to Colombia and Peru—hurting growth, exports, inflation, and fiscal positions. 7
• Valuations and earnings: After the substantial equity rally, valuations are less cheap than before. Further upside must increasingly come from actual earnings growth, productivity, investment, and reforms rather than simply multiple expansion. Insufficient evidence is available in the supplied sources to quantify the valuation change or a region-wide earnings forecast.
• Policy execution: Colombia’s rally, in particular, prices expectations of fiscal repair, while the broader regional thesis assumes policy consistency and pro-investment reforms. Failure to deliver could reverse capital inflows and asset-price gains. 17