The Big Idea
Lessons learned in LatAm sovereigns in 2025
This material is a Marketing Communication and does not constitute Independent Investment Research.
The main takeaway from last year in Latin American sovereigns was that technicals matter with positive total returns across all credits. However, elections also matter. This made the difference on relative outperformance. For next year fundamentals are more relevant with tight valuations and limited if any credit risk differentiation (Exhibit 1).
#1: Sometimes you buy everything
The winning strategy for 2025 was to own distressed, high yield and other credits sensitive to the broader market. Technicals dominated as did election cycles. Ecuador, Bolivia, Panama, Suriname, Bahamas and Honduras outperformed. There were clear breakaway winners but most of Latin America outperformed broader emerging market index returns. It was a “buy most anything” strategy and equally important, refrain from “underweight” recommendations. There were also clear idiosyncratic risks with center/right political transitions helping Argentina, Bolivia, Ecuador and Honduras outperform (Exhibit 1). The election cycles still matter!
Exhibit 1: Three years of double-digit returns and yield curve normalization
Source: Bloomberg, Santander US Capital Markets
#2: Contrarians can win
Recommendations to own Ecuador and Argentina into elections were the contrarian wins. Ecuador was my tactical overweight from April to June and in November and my biggest success on capturing most of the 57% total returns so far this year. Ecuador wasn’t featured in my year ahead outlook as I see it as a tactical and opportunistic trade. Argentina was my top pick heading into this year and again for next year on potential for further outperformance. However, tight valuations for ‘CCC/B’ credits requires an activist strategy to manage the likely volatility. The volatility and carry returns are the main potential contributions to total returns into next year.
#3: Look for ratings momentum
The Bahamas and El Salvador were my high carry, low beta combination. Bahamas was the outperformer among the ‘B’ credits on its transition into ‘BB’ and why I shifted into a higher conviction overweight mid-year on the positive rating momentum from impressive fiscal consolidation. El Salvador delivered lower beta and higher carry returns under the IMF program late last year and subsequent successful execution of fiscal targets through the third quarter thisyear. There is still potential for credit upgrade momentum. Honduras is also now in this category of ‘B’ credits that may migrate towards ‘BB’. The high carry and low beta combination offers potential for diversification from an uncertain external backdrop into next year.
#4: Watch the elections
Costa Rica remains my candidate for investment grade. This was not the case for most of 2025; however, expectations of stronger political and economic transition have helped drive spread compression ahead of February 1, 2026, general elections. Costa Rica is another example of the relevance of election cycles. Recent outperformance among the ‘BB’ credits has left Costa Rica to now flat to Paraguay on the illiquid shorter tenors with potential for more spread compression on the longer tenors (Exhibit 2). It’s important to remember that the favorable supply-and-demand technicals may argue for even tighter valuations.
Exhibit 2: Costa Rica the rising angel among LatAm ‘BB’ credits
Source: Bloomberg
#5 Technicals can surprise
The technicals were dominant for Panama. This was my miss. The proactive funding strategy was able to manage the supply risks with breathing room from Moody’s on extending the negative outlook into next year. The funding diversification to local markets and bank loans was able to avoid US dollar Eurobond markets and the supply penalty on the Eurobond curve. The still strong external demand met zero Eurobond issuance. The spending restraint in the third quarter also provided some breathing room for Moody’s to postpone the downgrade rating decision and extend the negative outlook for six months. This reinforced the supportive technicals with demand seeking high carry returns, especially liquid, market beta alternatives. The lower yields reinforced the lower cost of funding that reinforced tighter credit spreads while the investment grade rating still offers broader financing options. These favorable technicals require still funding diversification, still supportive external demand, and, maybe most importantly the follow-through fiscal adjustment to sustain the investment grade rating. The tighter valuations now face higher stakes into next year.
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