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The Russian-Ukraine conflict has “created a massive void in critical materials,” said Bank of America analysts. Monty Rakusen/Getty Images This story is available exclusively to Insider subscribers. Become an Insider and start reading now. The Russia-Ukraine war “has created a massive void in critical materials,” says Bank of America. This leaves room for commodity-rich regions like Latin America to boost prices and market share. Bank of America identified nine buy-rated stocks with exposure to Latin American commodities. Commodities — usually classified as an alternative asset class — have finally earned a rare opportunity to shine.
According to Wall Street experts, there are two major reasons to invest in commodities right now.
First, they’ve traditionally been a good hedge against inflation, which makes them excellent assets to diversify portfolios and protect against 40-year highs in consumer prices, said Hakan Kaya, senior portfolio manager at Neuberger Berman, in a recent podcast.
Second, sanctions on Russia stemming from its invasion of Ukraine have created a gap in commodity production that will need to be filled by companies in other previously overlooked nations, said Ajay Singh, an equity strategist from Bank of America.
“The ongoing invasion and the consequent sanctions from the West and its allies create a void in critical materials that will need to be compensated by the rest of the world,” wrote Kapur in a March 21 note. He specifically pointed to commodity-rich countries like Australia, Indonesia, Malaysia, Qatar, Saudi Arabia, South Africa — and particularly several in Latin America.
Latin America is a key commodity marketAmong those nations, Kapur highlighted Latin America as a primary beneficiary of a tightening commodities market thanks to the similarity between its exports and those of Russia and Ukraine.
“LatAm, being a global supplier of agricultural products and hard commodities, is key within the new order of global trade, as supply from Russia is impacted by sanctions and supply chain disruptions,” he wrote.
Specifically, the region supplies 55% of global crude soybean oil exports, 42% of lead ore, 25% of copper, 33% of maize, and a meaningful 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, said Kapur. He noted that, in recent years, factors like recessions, political uncertainty, and the impact of COVID have resulted in poor growth. As a result, Latin American stocks have missed out on a more-than-150% wave higher in commodity prices since March 2020, according to Kapur.
As COVID-19 concerns continue to fade and alleviate the pressure on economies around the world, particularly China’s, Kapur is optimistic that it’s time for “a new growth upcycle” to emerge in the Latin American market. He also noted that Latin American equities collectively rose 203% on average in the last three commodity price boom episodes since 1999.
Brazil stands outWithin the region, not all nations are equal, said Kapur, who cautioned that in the near-term, countries that import oil will suffer, while countries that export oil and food — both relatively inelastic goods — will be the main beneficiaries. In particular, he highlighted Brazil as his favorite market in the region due to its unique mix of macroeconomic factors.
Besides the obvious boost in trade for Brazil from a spike in commodity prices, Kapur wrote that the “big, liquid value and commodity names” in Brazilian equity indices would benefit from foreign investments flowing into value and commodities 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,” said Kapur. Brazil is also ahead of the US and other nations in the rate-hiking cycle, he added, “and in the past, a Fed hike did not stop Brazilian equities from rallying in the light of other positive drivers,” since most commodity-rich countries perform well in the first year of hikes.
Despite the positive outlook for commodities, Kapur cautioned that Latin America still faces the risks of higher inflationary pressures — especially as they’re currently compounding at a critical time when the region’s inflation is already high. These pressures, he continued, might negatively alter “social cohesion” in the community, especially as elections loom in Brazil and Colombia, and he also cited his fears of any potential “policy errors” from central banks as another risk to the region.
Buy-rated stocks with Latin American commodity exposureTo follow the investment thesis above, Kapur and his team identified nine buy-rated stocks exposed to Latin American commodities, mostly headquartered in Brazil. Below are those stocks, along with each company’s ticker, specific commodity exposure, market capitalization, and analyst commentary.
1. PetroRio
MarketWatch Ticker: PRIO3 BZ Equity
Exposure: Oil
Market cap: $3.9 billion
Commentary: “LatAm should benefit from upward pressure on oil prices with a potential effect related to higher risk perceptions … For LatAm oil companies, we expect the effect on earnings to be net positive, even if there are delays in passing through these full effects … Companies within our coverage exposed to oil [include] PetroRio and Ecopetrol.”
Source: Bank of America
2. Ecopetrol
MarketWatch Ticker: ECOPETL CB Equity
Exposure: Oil
Market cap: $34 billion
Commentary: “LatAm should benefit from upward pressure on oil prices with a potential effect related to higher risk perceptions … For LatAm oil companies, we expect the effect on earnings to be net positive, even if there are delays in passing through these full effects … Companies within our coverage exposed to oil [include] PetroRio and Ecopetrol.”
Source: Bank of America
3. Gerdau
MarketWatch Ticker: GGB US Equity
Exposure: Steel
Market cap: $8.8 billion
Commentary: “The conflict could continue to support iron ore prices in the short term and lead to higher-quality premiums (particularly for pellets) … LatAm could also benefit from supply disruptions in nickel, aluminum, steel, copper and pulp: LatAm is 6% of global nickel production and 6% of pulp shipments. Companies within our coverage exposed to the theme [include] CBA, Gerdau, Usiminas, and Suzano.”
Source: Bank of America
4. Usiminas
MarketWatch Ticker: USIM5 BZ Equity
Exposure: Steel
Market cap: $3 billion
Commentary: “The conflict could continue to support iron ore prices in the short term and lead to higher-quality premiums (particularly for pellets) … LatAm could also benefit from supply disruptions in nickel, aluminum, steel, copper and pulp: LatAm is 6% of global nickel production and 6% of pulp shipments. Companies within our coverage exposed to the theme [include] CBA, Gerdau, Usiminas, and Suzano.”
Source: Bank of America
5. CBA
MarketWatch Ticker: CBAV3 BZ Equity
Exposure: Aluminum
Market cap: $2 billion
Commentary: “The conflict could continue to support iron ore prices in the short term and lead to higher-quality premiums (particularly for pellets) … LatAm could also benefit from supply disruptions in nickel, aluminum, steel, copper and pulp: LatAm is 6% of global nickel production and 6% of pulp shipments. Companies within our coverage exposed to the theme [include] CBA, Gerdau, Usiminas, and Suzano.”
Source: Bank of America
6. Suzano
MarketWatch Ticker: SUZB3 BZ Equity
Exposure: Pulp
Market cap: $16 billion
Commentary: “The conflict could continue to support iron ore prices in the short term and lead to higher-quality premiums (particularly for pellets) … LatAm could also benefit from supply disruptions in nickel, aluminum, steel, copper and pulp: LatAm is 6% of global nickel production and 6% of pulp shipments. Companies within our coverage exposed to the theme [include] CBA, Gerdau, Usiminas, and Suzano.”
Source: Bank of America
7. 3tentos
Yahoo Finance Ticker: TTEN3 BZ Equity
Exposure: Fertilizers
Market cap: $920 million
Commentary: “LatAm is a global market leader in exports of several agribusiness segments, such as orange juice, soybean meals, soybean oil and soybean. Russia represents at least 2% of the global market in four of them — soybean oil, corn, chicken and wheat. Companies within our coverage exposed to the theme [include] 3tentos (long exposure to the fertilizers industry).”
Source: Bank of America
8. SMTO
MarketWatch Ticker: SMTO3 BZ Equity
Exposure: Ethanol
Market cap: $3 billion
Commentary: “LatAm should benefit from upward pressure on oil prices with a potential effect related to higher risk perceptions … For LatAm oil companies, we expect the effect on earnings to be net positive, even if there are delays in passing through these full effects … On a second-order effect, São Martinho and Raízen would benefit from higher ethanol prices, which tend to rise as gasoline prices rise.”
Source: Bank of America
9. Raizen
Yahoo Finance Ticker: RAIZ4 BZ Equity
Exposure: Ethanol
Market cap: $13 billion
Commentary: “LatAm should benefit from upward pressure on oil prices with a potential effect related to higher risk perceptions … For LatAm oil companies, we expect the effect on earnings to be net positive, even if there are delays in passing through these full effects … On a second-order effect, São Martinho and Raízen would benefit from higher ethanol prices, which tend to rise as gasoline prices rise.”
Source: Bank of America
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