(Bloomberg) -- Andean equity markets offer the best risk-reward in a decade, even after outperforming their counterparts in Brazil and Mexico by a wide margin this year, said BTG Pactual.

An improved political environment, higher commodity prices and the monetary easing cycle across Andean nations should combine to drive earnings growth and push the stocks higher in the second half of 2024 and in 2025, said analyst Alonso Aramburu in a note to clients.

“As is usual in Latin America, the political environment, and its implications on economic conditions, has been a key driver of asset prices,” Aramburu wrote. “This combo, along with support from commodity prices and a front-loaded easing cycle, are favoring Andean markets, particularly Chile and Peru.”

Chile’s IPSA index is up 3% this year and Peru’s IGBVL has gained 14%, compared with a drop of 7.1% in Brazil’s benchmark Ibovespa stock index, and a 9.6% decline in the Bolsa Mexicana de Valores.

Foreign investors have relative underweight positions in the Andean region, while local currencies look cheap, making for “potential extra drivers,” according to Aramburu. 

Elsewhere, mounting fiscal risks in Brazil and growing political noise in Mexico mean BTG sees limited room for a re-rating in both markets. By contrast, Aramburu expects stocks to jump 30-40% in Chile and Peru in the next year-and-a-half, and 20-30% in Colombia. 

“The economic rebound is becoming more visible in Peru and Chile, with recent upgrades to GDP growth estimates,” Aramburu said. “This backdrop should start to drive earnings growth more visibly in coming quarters, which should be the main catalyst for stocks to keep outperforming in the next 12 months.”

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