Latin American stock markets have incurred heavy
losses so far in 2013; what’s more, they have underperformed developed markets
by a wide margin:
Countries
|
Gain/loss
y-t-d A
|
Gain/loss
y-t-d in US$ B
|
Argentina[1]
|
+12%
|
-1.6%
|
Brazil
|
-24.2%
|
-31.4%
|
Chile
|
-13%
|
-17.6%
|
Colombia
|
-14.3%
|
-20.7%
|
Peru
|
-27.6%
|
-33.5%
|
Mexico
|
-7.5%
|
-7.4%
|
By comparison, the American S&P500 is up
17.1%. Even much maligned Western Europe
is up, with the laggards (Italy and Spain) suffering losses which are half those of the regional leader, Mexico.
What do we make of it?
Short term, the diagnostic of most observers has
some validity, mainly that with the drop in commodity prices, the economic
growth of Latin American countries has been decelerating which in turn has
weakened their currencies. Having been
the darlings of international investors, these commodity producers are now
under the same shadow as China, heretofore the main driver of commodity prices.
Another valid observation is that emerging markets got
carried away in the post 2008 recovery, which resulted in very fast increases
in both corporate debt issuance and stock valuations; then a series of sobering
international news and fear of Fed tightening widened corporate spreads and
reduced EM p/e multiples.
As usual, it is easier to construct causality links
by analyzing data bases than by weighing qualitative factors. Yet I believe that the latter are more
important for the medium and long-term.
For example, despite assertions to the contrary, it
is clear that Latin American markets are viewed by many investors as an asset
class, so that national stock markets within that region will tend to move
together, irrespective of their merits and specific characteristics. This is best illustrated by the case of
Mexico: its terms of trade have changed little in many years, its economy is
more closely linked to the US than to China, its financial markets are more liquid
and more free. Its stock market
performed less bad than the others, but one could have expected it to tag along
the S&P500 and be in the green.
Peru is the other example of contagion. Yes, it is the commodity play par excellence;
mining profits have suffered and the economy as a whole did slow down. But its finances remain the best in the
region with a moderate current account deficit, a small budget surplus and
ample foreign exchange reserves. More
importantly, good macroeconomic management has been the trademark of successive
governments rather than a recent phenomenon.
It doesn’t seem logical that it underperformed Brazil.
I have been bearish on Brazil since President Lula
announced the restructuring of Petrobras and the offshore oil sector. More than any of its neighbor, Brazil’s
misfortunes are self inflicted:
1. Disjointed
monetary policy where BNDES makes long term loans at interest rates below
overnight interbank rates,
2. Heavy
handed government intervention in the oil and gas, electric utility and
financial sectors to the detriment of minority shareholders,
3. Unpredictable
foreign exchange policy aimed at manipulating the parity of the currency,
4. Overly complex and arbitrary tax and
regulatory system,
5. Disconcerting
government which, on the one hand, professes to stand for (somewhat) free
markets while nurturing foreign alliances with regimes that stand at the polar
opposite.
I don’t see the economy improving substantially and
private investment returning unless and until a more centrist government is
voted in. Good center-left models would
include Ricardo Lagos and F. H. Cardoso.
Presidential elections are scheduled for next year and recent popular
protests in Brazil may bring about change.
If not, the future will be bleak.
There is little to say about Argentina: its
institutions are in shamble, its economy is atrophied and beset by highly
distorting regulations. Besides the poor
performance of its stock market in US dollar terms, one number says it all: in 2012,
total foreign direct investments into Argentina totaled $3billion[2]
vs. $13billion for Chile, $15 billion for Colombia, $40 billion for Mexico and
$50 billion for Brazil.
Chile has perhaps been the most surprising under-performer,
as its stock market losses have been double those of Mexico.
Clearly, the large weight of its mining sector in the economy and
its exports has accounted for a good deal of this disappointment, but not all. As I have written in this blog, I think that
reform fatigue has set in. This is
understandable when one realizes that a generation has passed since Chile
embarked on its trailblazing economic and social reforms. The fact that other left of center regimes in
the region have spent public funds with abandon has made it that much harder
for Chile to steer a virtuous path.
New presidential elections will be held next
November. Former President Bachelet is
the current favorite; however her discourse is more radical than her first term
policies. As I wrote in this blog, her
call for scrapping the Decree Law 600 which has guaranteed a stable foreign
investment regime is emblematic of a shift in the making and of the social
pressures she believes she is under.
Even under the current administration of President
Piñera, there were some unsettling signs in an otherwise market-friendly
framework; these included efforts to weaken the currency and unrelated attempts
by NGOs and local groups to stop large scale mining projects[3]. Chile still enjoys a stable legal system and rock-solid
public finances, but it is clear to this writer that the future may be
different for investors, especially the foreign ones. In a small country so dependent on exports,
this is not a good sign.
Colombia is perhaps the most interesting example. In a little over a decade, its economy and
financial markets have soared. To wit: in 12 years, the market value of Grupo de
Inversiones Suramericana, the largest private business conglomerate in the
country, rose by a factor of 33 in US dollar terms. This revival has been largely due to the
government success in fighting guerillas and drug traffickers and
in reestablishing a safe environment.
Repressed for years, economic activity blossomed, aided in no
insignificant manner by the existence of a large domestic market.
However, after overheating in certain sectors, the
picture has darkened. Again, there are
many obvious measurable factors to explain it: slowing global economy,
comparatively weak US dollar, investor angst, etc. But some of the wounds are self inflicted:
1. Economists
can well consult their models to prove how beneficial a “’competitive” currency
can be; but to the investor, it is one more factor of uncertainty and a drag on
performance when the peso loses 8% in 6 months.
It also extracts a heavy price when a company such as Ecopetrol
postpones its dollar borrowing exercises, only to discover that market
conditions have changed for the worse;
2. More
importantly, both the perception and reality of security in the country have
worsened. Most people are unsure of
where the negotiations with the FARC will end.
President Santos is widely regarded as very shrewd, but he may play
his cards too close to the vest, and this is not conducive to risk-taking by
businesses and investors.
In sum, there is no doubt that world economies and
market confidence are more fragile than they were some years back. One of the costliest consequences of the
so-called Great Recession is that policy makers, having lost confidence in free
markets, are now convinced that they can manipulate economies and markets back
to health. What they fail to realize is
that businesses and investors are more comfortable handling normal free-market
dynamics than arbitrary governmental policy inputs.
Another lesson is that investors pay close attention
the most basic and essential aspects of economic and political governance, and
more so when risk tolerance has fallen: government meddling, onerous tax regimes, predictable rule-making, transparency, stable and effective legal systems DO matter.
The flood of liquidity orchestrated by the main
central banks of the world since 2008 did affect Latin America as it brought
about a surge of portfolio investing in fixed income instruments; yet Latin
America is not totally without blame:
1. One
can think of the very high short term interest rates practiced by Brazil for example, and
2. The
region could have done better promoting productive investments in
infrastructure.
In sum, there is no disputing that human emotions
weigh in as much as rational analysis.
Mexico and to a lesser extent Peru seem to have been overly punished by
fleeing EM investors. But the same
cannot be said of others; indeed, what concerns this writer about Brazil,
Chile and Colombia is a policy drift away from what made them successful in the
first place, and this has little to do with China buying less copper or iron
ore.
[1] The US dollar
loss was calculating using the official exchange rate. If one uses the exchange rate implicit in the
pricing of such Argentine ADR as Telecom Argentina, then the dollar loss exceeds
49%.
[2] What is more,
this number probably overstates true FDIs as it is likely to include
reinvestments by Argentines of monies held abroad.
[3]
Unfortunately, some companies such as Barrick Gold gave them good
reasons to criticize environmental non-compliance.
