By: Kenneth Rapoza
Thanks to the Fed keeping interest rates on hold for the rest of this year and possibly throughout 2020, Barclays Capital thinks Latin American countries are the better growth story for emerging market investors.
They even have Venezuelan GDP growing next year. At 6%. How that happens is anybody’s guess.
For the countries with much deeper securities markets like Brazil, GDP goes from 2.2% growth to 2.6%. Colombia goes from 3.5% to 4%. Argentina goes from recession to 2.2% growth next year, a total economic boom if that forecast is proven right. Even Mexico grows despite a general slowdown in its main market, the U.S. Mexican GDP is seen going from 1.8% this year to 2% in 2020. All told, Latin America GDP improves in 2020 thanks to Mexico, Brazil, Colombia, and Argentina , growing at 2.6% instead of the 2% expected this year. That's better than Asia-Pacific growth rates, which are flat at 5.3%.
Other investment firms see it too.
“Our exposure remains limited in emerging markets, but we see Brazil as an opportunity,” says Bozidar Jovanovic, first vice president and portfolio strategist for Bank Leumi in New York.
Latin America mainly looks good because it is coming off a very low base. All of the major economies were either in crisis a year ago, are still in one or are coming out of a recession. Only Mexico has been holding steady, thanks to its main trading partner north of the Rio Grande.
The only country in Latin America that’s been a better investment than simply putting $1,000 in the iShares MSCI Emerging Markets exchange-traded fund this year has been Brazil. It’s up. The rest are down. Over the last 12 months, Brazil and Colombia have beat the benchmark, as measured by the MSCI Colombia Index.
Barclays actually revised their Brazil growth outlook lower for this year by 300 basis points, with downside risks hinging on the breadth of pension reform. That’s the biggest economic fundamentals story out of Brazil right now, and it could yet take a hammer to business and consumer confidence if it turns out to be a dud.
Mexico’s economy ended 2018 on a softer-than-expected note, but Barclays analysts led by Marco Oviedo in New York said in a recent report to clients that the country has the right conditions “for a rebound in the first quarter amid lower levels of uncertainty about the economy.”
Consumption could improve on the back of stable employment growth and real wages increases there too, while reduced uncertainty about Nafta could lead businesses to revamp projects that were delayed since Trump won the presidency and threatened to scrap the decades-old trade agreement.
Argentina is still ugly but on the mend. Barclays expects GDP bottomed in December. Economic data for January and February are showing some signs of a pulse.
On the other hand, higher inflation in Argentina—well over 35% a year—means higher interest rates will keep growth in check. The economy is set for stronger growth in the second quarter thanks to good harvest levels, and better performance of personal consumption because of wage recovery in spots.
Central banks in the region are expected to remain on hold for most of the year, with Brazil recently holding steady.
“Brazil’s central bank started to pave the way for a possible rate cut late this year,” says James Barrineau, a bond fund manager for Schroders in New York. He thinks they are likely to take a wait-and-see attitude towards pension reform. “If it is passed it will tilt the odds towards a rate cut by solidifying sentiment around Brazil,” he says.
The Fed’s dovish tilt will also make Latin America central bankers happier as it reinforces a weaker dollar scenario. Having the Fed on the sidelines should provide central banks more room and time to adjust monetary policy in response to domestic matters.
On the political risk front, Brazil's new president Jair Bolsonaro appears to be losing some popular support, a factor that could require him to dilute his original pension reform plan.
A financial rescue for Pemex, the state-controlled oil firm in Mexico, and additional fiscal measures are expected to be announced by Mexico’s new president Andres Manuel Lopez Obrador soon. A credit downgrade should not come as a surprise. Savvy fixed-income investors will wait for the usual knee-jerk reaction and buy-in within a day.
Meanwhile, Argentina is getting ready for its presidential election in October. President Mauricio Macri’s chances of success depend on a stable peso and a stable-to-growing economy. It’ll be a negative growth story for Argentina, but -2.1% is better than -3%. That’s as good as it gets. Markets are watching the peso and Macri’s challengers, namely Cristina Kirchner. So far she has not made any promises to scrap the $56 billion International Monetary Fund bailout. But if she is in a runoff election with Macri in the fall, investors will immediately discount another Kirchner default.
“Macri’s electoral competitiveness could increase from what polls show today if the peso stabilizes and inflation starts to decline. In fact, the improved EM environment should help the peso,” Oviedo says.
Finally, in Venezuela, conditions support the possibility of a fracture within the ruling Socialists United party led by President Nicolas Maduro. With money continually running out, cash-flow stress could open the door for political change with Maduro stepping down and an interim military-led government taking over, perhaps calling for early elections.
Venezuela’s sharp decline in oil production and its financial support for Cuba are reaching critical levels that exceed the portion of financial resources available to pay for things at home. This includes infrastructure such as electric power and paying for the support of midlevel officers in the military. If the Venezuela crisis is prolonged, the capacity of the economy to recover will be compromised, but the country is so isolated as it is that there would be no spillover other than in Colombia.
Colombia is the hardest hit from Venezuela, housing over 1 million migrants.
The trade war has largely kept Asian in tact but on pause. Growth is slowing in China, but BlackRock strategist Richard Turnill thinks it’s bottomed. If so, that could set the stage for China to remain a hot spot. And for smaller southeast Asian countries like Thailand and Vietnam, both of which can be traded in ETF products, looking more like an opportunity than these four countries in Latin America.