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From Politics to Policies: A Guide to Latin America Markets in 2019

From Politics to Policies: A Guide to Latin America Markets in 2019

(Bloomberg) -- Latin America’s two largest markets will start 2019 in the hands of new populist presidents who pledge to overturn decades of consensus policies in an effort to revitalize growth and boost investor confidence.

In Mexico, traders are watching to see whether President Andres Manuel Lopez Obrador turns campaign rhetoric into political reality after his early adoption of referendums to decide investment projects spurred a selloff in the peso. By contrast, Jair Bolsonaro in Brazil wooed markets when he chose former money manager Paulo Guedes as his economic adviser, boosting the Ibovespa to an all-time high. Yet concerns remain about his ability to push an overhaul of the pension system next year, which will be key for a continuation of the rally.

Stocks and currencies in Latin America are headed toward their worst year since 2015, joining a selloff in emerging markets as concern over the outlook for global trade and an economic slowdown weighed on investor sentiment. While escalating trade tensions threaten to drive further volatility across risk assets, prospects for a weaker dollar and a pause in the Federal Reserve’s tightening cycle could bring relief to local markets. Whether regional leaders push through measures to boost growth remains the wildcard for 2019.

From Politics to Policies: A Guide to Latin America Markets in 2019

Emerging-market rallies are a lot more likely early in 2019 than later in the year, when attention starts shifting to a possible U.S. economic downturn, according to Goldman Sachs Group Inc.’s Chief Latin America Economist Alberto Ramos. While most developing-nation assets will rebound from this year’s turmoil, they’ll probably produce low single-digit returns, he said. His top picks for 2019 include developing-nation equities hedged against non-U.S. stocks as well as the Colombian peso and Brazilian real.

While Ramos says he isn’t concerned about the policy direction in Brazil, governability is “the biggest question,” according to him. Meanwhile, his advice to Mexico’s Lopez Obrador is that he doesn’t “rock the boat and think instead of ways to increase long-term growth potential.”

Brazil

Overhauling the nation’s inefficient public pension system is the priority for traders and any disappointment on that front would inevitably sour markets. The measures are seen as key to trimming the budget deficit and curbing the rise in public debt, which cost Brazil its investment grade rating in 2015. Bolsonaro wants to put a bill to Congressional vote in the first half of the year.

The new government is also expected to sell dozens of state-owned companies, deregulate industries and cut taxes to attract investment and create jobs. Investors are mostly optimistic about Bolsonaro’s agenda, raising the bar for the new economic team led by Guedes, which has strong credibility among financial market participants.

“If we see the pension reform as early as February or March, as some people say, that would be extremely positive for markets,” said Laurence Bensafi, a London-based fund manager at RBC Global Asset Management Ltd., who piled into Brazilian assets after meeting Guedes in September. “As soon as the vote is behind us, you may see quite a lot of investment that has been stopped for basically four years."

Mexico

Lopez Obrador, the nation’s first leftist leader in decades, presents the biggest risk and potential reward for portfolio managers. He roiled markets even before taking office by saying he would cancel a partially built, $13 billion airport following a public consultation. He then doubled down on the approach, holding referendums on 10 other proposals, including an $8 billion refinery project, a Mayan train and social programs that some analysts say could put strain on the nation’s fiscal position. Ongoing negotiations with airport bondholders are also under intense scrutiny from investors looking for hints of how they’ll be treated by the new administration.

But the noise may mean opportunity for traders looking to enter one of Latin America’s more stable nations. The 16 percent slide in stocks this year has created value and if Lopez Obrador can deliver on his promise to boost growth by ending decades of orthodox policy, investors may be pleasantly surprised. Yet the early days of his presidency suggest a bumpy ride ahead.

Argentina

Macri faces an election in October amid the nation’s second recession in three years and a currency that is once again poised to trail all others. Declining political support in the run-up to the vote could hamper his administration’s ability to push through Congress the changes markets have been demanding.

If former President Cristina Fernandez de Kirchner’s approval ratings climb and Macri’s ratings skid further, investors will command an even higher premium to hold Argentine assets, according to Josephine Shea, a portfolio manager at Standish Mellon Asset Management in Boston.

Venezuela

Investors in Venezuela can console themselves with the thought that things can’t get much worse after the nation’s recession extended into its fifth year, the worst performance by any economy outside wartime. Still, there’s no end in sight to the suffering. President Nicolas Maduro officially starts a new six-year term in January after his government defaulted on more than $7 billion in debt. Talk of military intervention by everyone from retired colonels to Donald Trump and Bolsonaro’s son has spurred optimism about a market-friendly leader taking office. Yet mass emigration, repression and economic collapse mean there are fewer Maduro critics on the ground.

Colombia

Markets will be waiting to see whether Duque can help stabilize the nation’s high debt burden and meet its fiscal deficit target. Lisa Schineller, managing director of sovereign ratings at S&P Global Ratings, said his administration must devise some combination of tax increases or spending cuts by 2020.

"The main risk in Colombia is if the government doesn’t generate sufficient economic growth to deal with its twin deficits," Shea said. "It might ultimately be forced to face real fiscal reform in pensions and social security sooner rather than later. Politically in most countries, reforms like these are always a tough nut to crack."

Chile

The risks facing Chile can be summed up in one word -- China. The Asian giant accounts for almost half of Chile’s copper shipments and nearly a third of its total exports, having overtaken the U.S. as the country’s largest trading partner. Should the U.S.-China trade war reignite and slow Chinese growth, copper prices would fall, slashing income from the metal that represents almost half of Chilean exports. Demand for other staple exports -- wine, fruit, salmon and pulp -- would also decline.

Peru

Peru’s crusade against corruption may open new fronts next year should a pending plea deal with Odebrecht implicate more former officials, politicians and businessmen. President Martin Vizcarra is at the forefront in the fight against graft, boosting his popularity, but if popular opinion cools, he has no political party or voter base to draw on and investor confidence could suffer. Any flareup in anti-mining sentiment or a drop in copper prices could threaten investment that’s expected to underpin growth over the next few years.

To contact the reporters on this story: Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net;Ben Bartenstein in New York at bbartenstei3@bloomberg.net

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, Philip Sanders

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