The shift marks a dramatic reversal in sentiment across emerging markets, with fund managers showing their highest risk tolerance in over three years, according to Bank of America’s September Latam Fund Manager Survey.
The Fed’s quarter-point rate reduction this week, whilst widely anticipated, has crystallised expectations for steady monetary easing throughout the remainder of the year. The nearly unanimous decision—with only newly appointed member Stephen Miran dissenting—signals the central bank’s growing concerns over labour market weakness and indicates a resumption of the easing cycle paused since December 2024, according to Refinitiv data.
Brazilian Real powers ahead
Brazil stands at the centre of this emerging market resurgence. The real has surged 14.3% year-to-date, trading near one-year highs as investors pile into
carry trades offering implied yields of 13.3% annually through three-month forwards, according to ING analysis. This compares favourably with Brazilian inflation running at approximately 5%.
Bank of America’s September survey of Latin American fund managers revealed a dramatic change of heart towards Brazilian equities. Expectations for the Ibovespa index turned markedly positive, with half of respondents now projecting a close above 150,000 points by end-2025, compared to just 10% in August. The index has already reached fresh record peaks, rising 1% on September 17 alone.
‘There’s a central bank policy divergence between regions; it seems like the United States Federal Reserve is willing to admit that there are some worrisome indicators across labour,’ Juan Perez, director of trading at Monex told Reuters reporters.
The Banco Central do Brasil is widely expected to begin cutting its 15% policy rate—currently at near two-decade highs—as early as December, with markets pricing 250 basis points of easing over the next 15 months, ING noted. Half of fund managers surveyed by BofA anticipate at least one additional Selic rate cut this year.
Brazil’s economic fundamentals appear supportive, with GDP expanding 0.4% quarter-on-quarter in the second quarter and rising commodity prices providing additional tailwinds, according to ING. But political risks loom large, particularly around President Luiz Inácio Lula da Silva’s potential
pre-election spending splurge and ongoing tensions with Washington over the recent sentencing of former president Jair Bolsonaro, a close ideological ally of US President Donald Trump.
Mexico maintains momentum
The Mexican peso has extended its winning streak to eight consecutive sessions, its longest run since March 2024, though it pared gains slightly on September 17, Refinitiv reported. The currency is trading around 18.50 against the dollar, with analysts at ING targeting 18.25 or even 18.00 in a softer dollar environment.
Banco de México appears poised to follow the Fed’s easing trajectory, with markets pricing just 75 basis points of cuts to 7.00%, compared to the Fed’s expected 125-150 basis points of reductions. This suggests scope for more aggressive Mexican rate cuts than currently anticipated, given the central bank’s confidence that inflation will reach its 3% target next summer.
Mexico has launched public consultations on the United States-Mexico-Canada trade pact ahead of its scheduled 2026 review, though trade tensions appear to be diminishing as a concern for regional markets.
Chile faces currency intervention
Chile presents a more complex picture, with the central bank actively working to limit peso appreciation through a new foreign exchange reserve building programme, ING noted. The bank plans to purchase $25mn daily for three years, totalling $18.5bn, partially offsetting a $14bn IMF credit facility expiring next year.
Despite this intervention, copper demand driven by the weaker dollar has strengthened Chile’s terms of trade significantly. Chilean stocks remain up 34% year-to-date, nearly triple the S&P 500’s gains over the same period, though they retreated 0.65% on September 17 on declining copper prices.
Argentina struggles amid political turmoil
Argentina stands as the region’s outlier, with the peso suffering its eleventh consecutive session of losses to reach fresh record lows, according to Refinitiv data. The currency has plummeted 43% year-to-date, facing intense selling pressure in the wake of President Javier Milei’s stinging defeat in recent provincial elections.
The central bank was forced to intervene on September 17, selling US dollars after the peso breached the floor of its trading band, traders told Reuters. Despite GDP growth of 6.3% in the second quarter under Milei’s austerity programme, investors remain divided on the country’s prospects, with fund
managers adopting largely neutral positions ahead of the crucial mid-term elections in October, according to the BofA survey.
Regional outlook brightens
The broader shift in investor sentiment reflects changing perceptions of regional risks. Whilst US economic slowdown topped concerns in August, fund managers now cite US interest rates as the primary vulnerability for Latin American markets, the BofA survey showed. Trade tensions linked to tariffs in Brazil and Mexico are expected to diminish in the coming months.
Fund managers have increased exposure to higher-volatility sectors whilst maintaining preferences for quality and growth strategies. Financials and utilities remain the most overweight sectors, with commodities continuing to lag in popularity.
The rally in Latin American assets appears well-positioned to continue, supported by the Fed’s dovish pivot, improving carry trade dynamics, and stabilising political conditions across much of the region. However, the divergent paths of individual countries—from Brazil’s strength to Argentina’s political struggles—underscore the importance of selectivity in this nascent emerging market recovery.
