The coronavirus pandemic is opening up opportunities for exchange-traded fund (ETF) investors who are willing to look for value plays that could offer future upside potential in exchange for volatility risk today. One of those could be the MSCI Latin America Pacific Alliance ETF (PACA).
As countries cycle in and out of reopening their respective economies again, it could be Latin America that could be the caboose in this dynamic train of events. The concept of “last in, last out” could very well apply to Latin America as it deals with this pandemic.
“Latin America is now the global epicenter of the COVID-19 pandemic, with the number of new daily reported infections increasing, or remaining close to recent peaks, in most major countries,” a S&P Global article noted. “In some countries, this has meant the extension of stringent lockdowns, and in others, it has meant a slower relaxation of those measures. Across the board, households and businesses are more cautious. As a result, S&P Global Economics has lowered its GDP projection for Latin America by just over 2 percentage points to a contraction of roughly 7.5% in 2020. We expect growth to be just shy of 4% in 2021. Risks are mostly to the downside and tied to the evolution of the pandemic.”
Even if things get worse before they get better, PACA could present ETF investors with a value play if they’re willing to stomach the volatility. PACA seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI Latin America Pacific Alliance Capped Index.
The fund will invest at least 80% of its total assets (but typically far more) in component securities of the underlying index. The underlying index is designed to provide exposure to equity securities of issuers from Latin American member states of the Pacific Alliance, currently consisting of Chile, Colombia, Mexico, and Peru, as well as securities that are headquartered and carry out the majority of operations in the respective country.
Patience is Key
However, investors will have to be patient. With a lot of uncertainty floating around in the markets, it’s difficult to tell if PACA can completely pull itself out of its 28% decline year-to-date based on Yahoo Finance performance numbers.
Nonetheless, it’s experiencing a slow, but steady recovery since the March sell-offs. After hitting a low of $13.42 on March 23, it’s gone as high as $19.81 on June 8.
“Latin America was among the last regions to be hit by the pandemic, with most major economies confirming their first COVID-19 cases in March, a bit over two months after China and about one month after Europe and the U.S.,” the article added. “As a result, and because of the lack of success so far in containing the spread of the virus, Latin America is likely to be one of the last regions to exit the pandemic.”
Once again, patience is key. Even as the economy starts to recover, the grind back to pre-Covid levels could be a slow grind.
“We assume that the virus will be broadly contained by the end of the third quarter of this year, with mostly isolated periodic infections from that point on,” the S&P article said. “We also do not expect a return to stringent nationwide lockdowns in places where they have already been relaxed. However, there is a high degree of uncertainty regarding this scenario, which means it’s a major downside risk to our GDP projections.”
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