How will political change impact investments in the region in 2019?
Bryan Carter: At a broad level what’s quite exciting is that the majority of the governments in South America, in the large countries at least, are now very pro-market. We already had that in Argentina, while new governments in Brazil, Colombia, Peru and Chile are very market-orientated. That’s really exciting, you’d have to go back to the 1980’s or 1990’s to when that was last the case. So, it should bring economic dividends. In Brazil you have a pro-market, pro-reform, pro-investment government that should cut taxes and regulation and release growth. Meanwhile in Colombia and Chile you will see a resumption of the investment and consumption that was put on hold because of elections – so you’re at the beginning of the investment cycle in these countries.
In Argentina you could actually see some market momentum if Macri manages to regain support between now and October. One positive aspect is that Argentina now has a more standardised model of primaries than it used to, so we should know a lot more by the time the primaries are over. It will mean there is less volatility than we saw with the Brazilian elections because the new Argentine system lends itself to a more orderly revealing of knowledge.
Alfredo Mordezki: First, after very widely publicised and contested elections, we will see a reduction in uncertainty, as teams get appointed and start managing the economy, affecting the business climate. The weak investment landscape associated with election uncertainty is expected to recover, particularly in Brazil.
Regarding the outcomes of the election, market expectations are for a very pro-business approach in Colombia and Brazil and a more uncertain landscape in Mexico. We also need to keep in mind the issue of governability with respect to the ability to have significant pieces of legislation approved through Congress. With this in mind, Brazil is still a big question mark, even if the first steps, such as the appointment of the speaker of the house, raise positive expectations.
People compare Bolsonaro to Trump; is it an accurate comparison?
BC: In Brazil, Bolsonaro believes in responsible economic policy and wants to balance the budget and make social security sustainable – unlike the US. He’s extremely economically orthodox – he’s literally reading the textbook. Perhaps more worrying is his social policy. He has some strong views on minorities, individual rights, freedom of expression and rule of law. It will be a test of Brazil’s nascent institutions, in a democracy that is just 35 years old, to see if they can withstand that. But his biggest challenge is that he doesn’t really have a mandate. Yes, he won the popular vote and lots of people want him to clean up the dysfunctional Brazil created by years of PT rule and the calamity of the Temer interim government. But knowing Brasilia to some extent – I worked for the US State Department there – it is hard to get stuff done without a majority in congress. The market seems to have priced in immediate action – ie a satisfactory pension reform that stabilises debt ratios and balances the budget. It could happen but I think it’s less likely than the market thinks.
AM: There are some similarities however there are many more factors that are Brazil-related and reflect long-running social and economic issues in Brazil. I actually think that regardless of Bolsonaro the economic cycle in Brazil calls for a pick-up in growth. We have had two years of a very tough recession, followed by a weak recovery. Never in Brazilian economic history have we seen a recovery with growth of just 1.8%. The reason is that during the recovery the financial institutions were still very much on hold in terms of lending. There were lots of economic reasons to start lending but it was restricted because of the uncertainty surrounding the election. If you look at consumer leverage, non-performing loans and the retail sector they all point to a recovery in lending but that didn’t happen. So, I think that there is a pent-up bounce back waiting to happen.
Something similar happened on the industrial side. If you look at the Brazilian companies that have been repairing their balance sheets over the last few years, they were ready to make investments in 2018 but because of political uncertainty they decided to remain on hold. That capital regeneration allows for a stronger deployment of capex, so we should expect lending to resume. Of course, it helps that we have a market-friendly government with a well-respected team but I think the recovery comes from deeper economic factors.
What Latin American economies do you expect to outperform in 2019?
BC: We see a pick-up in activity in Colombia, Peru and Chile. Meanwhile Argentina has gone into recession which impacts Uruguay. Of course, if things go well, they could recover much more sharply because they are high-volatility economies. But overall, Colombia is the standout economy. It was expanding at 2.5% in 2018 and that will be 4% in 2019, which is the most exciting growth story in the region that we can point to with any certainty.
AM: The market that I will risk mentioning is Argentina, even though I know it’s a forbidden land for many investors in 2019 because of the elections. I think it makes sense to be present in Argentina because it will surprise investors if they can stabilise the economy which they seem to be doing. The way the country has managed the crisis has been impressive and the companies that we have been looking at are in good shape for 2019 and 2020. But investors need to see materially lower inflation to recover faith, so interest rates could go significantly lower.
I believe that the chances of a government that is completely the opposite of the current administration are very low. I also think that in terms of currency adjustments we already went a long way in 2018 and the situation has improved. I think there were a lot of international investors in Argentina for the first time that took a big hit last year and have left. So now it’s a more committed investor base looking deeply at the fundamentals and the companies. It’s noticeable that even after the devaluation we didn’t see such a strong deterioration of credit quality in Argentina, so we should see fundamentals prevail.
