What happened
Shares of several Latin American tech stocks struggled today along with the broader market, as investors continued to fret about volatility and the potential for a more severe recession in the near future.
Shares of the Uruguayan online marketplace MercadoLibre (MELI 0.87%) fell more than 4% today, shares of the Brazilian e-commerce tech company StoneCo (STNE -0.20%) fell roughly 7.5%, and shares of the Brazilian digital bank Nu Holdings (NU 1.24%) fell 7.4%.
So what
Tech stocks continued their recent struggles, with the Nasdaq Composite falling roughly 2.85%. It was a bit of a funky day yesterday, with the yield on the U.S. 10-year Treasury bill topping 4% for the first time in a decade.
Image source: Getty Images.
Rising yields have caused a lot of pain in the stock market, but stocks surprisingly ripped higher yesterday after the Bank of England announced it would begin buying long-term bonds for the next few weeks to try and stabilize the British pound sterling, which has been in free fall lately.
Still, the Bank of England only expects to do this temporary bond-buying program until Oct. 15 and long-term would still like to reduce the size of its balance sheet in the same restrictive policy the U.S. Federal Reserve is employing right now. The yield on the 10-year Treasury note rebounded today.
″[We] remain skeptical that the calmer mood in markets on Wednesday marks an end to the recent period of elevated volatility or risk-off sentiment," said Mark Haefele of UBS in a research note today, according to CNBC. "For a more sustained rally, investors will need to see convincing evidence that inflation is coming under control, allowing central banks to become less hawkish."
Tech stocks have not fared well in the face of rising interest rates this year, especially after rising to such lofty valuations toward the end of last year. Rising interest rates reduce the future value of cash flows and make other safer assets like treasury bills yield more.
Furthermore, concerns of a severe global recession would not be good for the likes of MercadoLibre, StoneCo, and Nu, which rely on consumer spending as well as vibrant business activity to fuel their businesses.
Now what
While it has been a tough go for these stocks this year, I am bullish long-term on the tech and fintech sectors in Latin America.
Alejo Czerwonko, UBS's chief investment officer of emerging markets, also seems to like Brazilian stocks due to the strong economy and the fact that the upcoming presidential election in October is not expected to significantly alter policy.
"Brazilian equities have awakened this year," Czerwonko wrote in a research note recently, adding that the sector "should benefit from higher-for-longer commodity prices" and "very attractive valuations."
Czerwonko further believes that because Brazil stepped up to address high inflation earlier than other countries, the central bank may soon be done tightening and can begin to ease monetary policy as soon as early next year.
Latin American economies can be volatile and difficult to gauge, but they also are full of huge emerging markets that create massive market opportunities you won't find elsewhere. MercadoLibre, StoneCo, and Nu are well positioned to take advantage. The ride likely won't be smooth, but I do see great long-term potential.
