• The Russian-Ukrainian war “created a massive void in critical materials,” Bank of America says.
• This leaves scope for commodity-rich regions like Latin America to increase prices and market share.
• Bank of America has identified nine stocks listed for buy with exposure to Latin American commodities.

Commodities – generally categorized as an alternative asset class – have finally earned a rare opportunity to shine.

According to Wall Street experts, there are currently two major reasons to invest in commodities.

First, they have traditionally been a good hedge against inflation, making them excellent assets for diversifying portfolios and protecting against 40-year highs in consumer prices, said Hakan Kaya, senior portfolio manager. at Neuberger Berman, in a recent podcast.

Second, sanctions on Russia resulting from its invasion of Ukraine have created a void in commodity production that will need to be filled by companies from other previously neglected countries, said Ajay Singh, equity strategist at Bank of America.

“The ongoing invasion and consequent sanctions from the West and its allies are creating a void in critical materials that will need to be filled by the rest of the world,” Kapur wrote in a March 21 memo. . He specifically mentioned commodity-rich countries like Australia, Indonesia, Malaysia, Qatar, Saudi Arabia, South Africa – and in particular several in Latin America.

Latin America is a key commodity market

Among these nations, Kapur pointed to Latin America as the main beneficiary of the tight commodity market thanks to the similarity between its exports and those of Russia and Ukraine.

“Latin America, as a global supplier of agricultural products and raw materials, is essential in the new world trade order, as supplies from Russia are affected by sanctions and supply chain disruptions. supply,” he wrote.

Specifically, the region provides 55% of global exports of crude soybean oil, 42% lead ore, 25% copper, 33% corn and a significant amount of products like fish, barley, wheat , wood, orange juice and other 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 led to weak growth. As a result, Latin American stocks have missed a more than 150% surge in commodity prices since March 2020, according to Kapur.

As COVID-19 concerns continue to fade and ease pressure on economies around the world, particularly China’s, Kapur is optimistic that it’s time for a “new upward growth cycle” is emerging in the Latin American market. He also noted that Latin American equities have collectively risen 203% on average during the last three bouts of commodity price booms since 1999.

Brazil stands out

In the region, not all nations are equal, said Kapur, who warned that in the short term, countries that import oil will suffer, while countries that export oil and food – two relatively inelastic goods. – will be the main beneficiaries. In particular, he highlighted Brazil as his preferred market in the region due to its unique combination of macroeconomic factors.

In addition to the obvious increase in trade for Brazil following a surge in commodity prices, Kapur wrote that the “large liquid value and commodity stocks” of Brazilian equity indices would benefit from foreign investment flowing in. towards value and commodity strategies.

Additionally, Brazil alone is responsible for 22% of all iron ore exports in the world, and the country “has almost no direct exposure to Russia in terms of trade,” Kapur said. Brazil is also ahead of the United States and other countries in the rate hike cycle, he added, “and in the past a Fed hike hasn’t stopped Brazilian stocks from to recover in light of other positive drivers,” since most commodity-rich countries perform well in the first year of increases.

Despite the positive outlook for commodities, Kapur warned that Latin America still faces the risks of higher inflationary pressures, especially as they are currently worsening at a critical time when the region’s inflation is already high. These pressures, he continued, could negatively alter “social cohesion” in the community, particularly in the run-up to elections in Brazil and Colombia, and he also cited his fears of possible “political mistakes from central banks as another risk for the region.

Listed stocks long with exposure to Latin American commodities

To follow the investment thesis above, Kapur and his team have identified nine buy-listed stocks with exposure to Latin American commodities, most of which are headquartered in Brazil. Below are those stocks, along with each company’s ticker, specific commodity exposure, market capitalization, and analyst commentary.