The Missing Piece in Latin America’s Bull Case

Our Chief Latin America Equity Strategist Nikolaj Lippmann explains why Brazil’s election, the cost of capital, AI investment and geopolitics could help unlock a new era of growth across Latin America.Read more insights from Morgan Stanley.----- Transcript -----   Welcome to Thoughts on the Market. I'm Nikolaj Lippmann, Morgan Stanley's Chief Latin America Equity Strategist. Today – why Brazil could be the missing piece of what we call LatAm Spring, and what AI has to do with it. It’s Thursday, October 15th, at 10am in New York.Brazilian equities rallied sharply last week after a surprising first-round presidential election result. Flávio Bolsonaro finished ahead of President Lula, setting up a runoff later this month. The outcome remains uncertain. But for investors, I think there’s a bigger question. Can Brazil approach a policy shift that unlocks something the country has lacked for years: investment. We've long argued that Latin America is moving from a consumption-led economy towards an investment-led cycle, thanks to: 1. Changing geopolitics; 2. investment-friendly policies; and 3. The potential for lower interest rates. What's more, this fits into the framework of the AI CapEx cycle, driving the global and especially the U.S. economy that has moved from consumption to CapEx, as argued by Mike Gapen, our U.S. economist. We're already seeing signs of this LatAm Spring in Argentina, Chile, Peru and Colombia. Brazil could be the largest missing piece. And there are three reasons why. First, the cost of capital. Brazil remains one of the world's most expensive places to invest. High government debt and elevated interest rates have made fixed income investment more attractive than equities or entrepreneurial risk-taking. But credible fiscal reform could change that equation. Lower government spending could reduce borrowing costs, strengthen the currency, and encourage private investment. Which means capital could shift from sitting in fixed-income assets toward funding growth. Second, AI. AI might seem unrelated to Brazilian politics, but we see an important connection. Our global framework suggests that annual capital spending could rise from roughly $2.5 trillion to about $5 trillion - $6 trillion as companies build out global AI infrastructure. And Latin America has a critical role to play. Data centers need electricity. Electricity requires energy infrastructure. And the infrastructure requires copper, lithium, and other critical minerals. Latin Ameri