Long-Term Resistance Levels Likely To Limit Rally In Regional Equities
While sustained breaks of key technical resistance levels for several Latin American equity indices could spell some further upside for regional equities in the short term, we see little scope for long-term resistance levels to be taken out. Given our view for a slowdown in Chinese economic activity this year, despite potential for a small stimulus package, and our Commodities team's forecast for lower average industrial metals prices this year, we anticipate that a number of Latin American equity markets will face substantial headwinds in the coming months. As such, while the MSCI Latin America index has broken through support-turned-resistance around the 3,000 level and is now heading back towards a strong area of resistance around the 3,500 level, we believe that resistance will hold and the index will remain within its broader downtrend.
The recent rally has been driven in large part by surges in Colombia's IGBC equity index, Brazil's Bovespa, and Chile's IPSA, which have returned from negative territory earlier this month to post gains in the year-to-date (see chart below). While we are relatively constructive on the IGBC, given a robust economic growth outlook in Colombia that will see earnings expectations rise, we hold more negative outlooks on the IPSA and Bovespa over a multi-month timeframe, as they are highly exposed to declining industrial metals prices and a structural slowdown in the Chinese economy.
Indeed, Colombia's IGBC is at technical crossroads, having broken through trendline resistance around 13,900 in recent weeks, but now re-testing resistance-turned-support. Should the index sustain this break and continue to push higher, the next key resistance level comes in around 14,900. We believe that this level will hold, as momentum indicators would look highly overstretched and valuations would have seen a substantial uptick following 25.4% of gains after the index bounced off long-term support at 11,900.
|Downtrend To Be Tested|
|MSCI Latin America Equity Index|