Ideas for making money in Brazil and Argentina

Bright spots are there in these nations, argues Matein Khalid

After five years of pathetic underperformance, emerging markets are easily the asset class to own in 2011, as Europe is hit by a resurgent euro/Italian banking woes and Japan by institutional gaijin selling and a stronger yen. A dovish Janet Yellen has talked down the US dollar and deferred the timing of FOMC interest rate hikes. The Chinese Politburo and People's Bank have managed to stabilise the yuan despite the lowest economic growth rate in 25 years. Brent has surged to $45 despite the failure of the Doha deal as the market focuses on the Black Death in offshore/shale capex and output. The Russian rouble, recommended as a strategic buy in this column at 78, is now 65. If ever the macro stars were aligned for emerging markets, the first four months of 2016 have been it.
Brazil's Petrobras corruption scandal has devastated the political stability, sovereign wealth rating, currency and stock market of Latin America's largest economy, a $2 trillion colossus. In 2015, the Brazil real lost a staggering 34 per cent against the US dollar. However, the foreign exchange market and the Bovespa now price in a new government in Brazil as the lower house of Congress votes to impeach President Dilma Rousseff.
As Rousseff has no real support in the Senate, her only option is to resign and end 14 years of populist, corrupt Workers Party rule. This prospect is the reason the real has surged 13 per cent against the US dollar in 2016, even though the central bank in Brasilia has done its best to dampen its rise via reverse swaps. Brazil's sovereign five-year credit default swap has fallen 200 basis points from its crisis highs. This has led to a bull market in Brazil's Bovespa stock market index. Brazil is still in recession, 150 legislators in Congress still face corruption probes, the GDP could contract 3.5 per cent in 2016, the budget deficit is eight per cent and Vice-President Michel Temer has low approval ratings only a little higher than the current, disgraced president. There is a global component to Brazil's spectacular 2016 performance but fund managers are now positioned for a Narendra Modi- or Mauricio Macri-style political regime change.
The ideal proxies for Brazil's sovereign retreating are Banco Itau Unibanco, Banco Bradesco and shopping mall operator BR Malls while Ambev is not just a pure-play Brazil stock. Temer will be Brazil's president in the next four weeks. I expect the stock market rally to continue as Temer implements his ideas on fiscal austerity and structural reform.
The iShares Brazil index fund is up 32 per cent for US dollar investors in the first four months of 2016. I expect there is at least another 20 per cent upside left in the index, in the land of samba, Pele, Gisele and, yes, Dilma!
Argentina has defaulted on its sovereign debt eight times in its history as a nation, has a 30 per cent inflation rate, a six per cent fiscal deficit and publishes economic statistics that rival China in their unreliability. Yet Argentina is also the hottest sovereign bond issuer in the emerging markets. The world's smart-money bid $68 billion for $16.5 billion in new Argentina bonds, the first new issue since the $100 billion sovereign default in 2001. Argentina's 13-year-old Peronist nightmare under the Kirchners is over and President Macri's peso devaluation, subsidy reform, tax cuts and deal with holdout creditors have all mesmerised the euromarkets. Argentina's US dollar 10-year note is very attractive at 7.6 per cent, given that Colombia yields only four per cent and Paraguay trades at five per cent. Index funds will be forced to buy $4 billion of the new issue and the sovereign credit cycle will be upgraded in 2016. A dovish Yellen Fed makes sovereign high-yield debt a winner, especially since Argentina issued no dollar bonds after it was blackballed from the global capital markets. Unlike other frontier markets issuers Zambia, Ghana and Bangladesh, Argentina is a developed native, albeit in recession and vulnerable to the decline in both Brazil and agri-commodities. Argentine bank shares will also benefit hugely from Macri's reformist economics.
Argentina's 10-year when issued bond has surged to 103 as I write, with the yield to maturity now at seven per cent. This is a blowout new issue. Obviously, investors without a credible allocation scrambled to accumulate Argentine debt in the secondary market. The successful sovereign issue now means the provinces of Córdoba, Mendoza and Entrerios can issue debt in the international capital markets.

macro ideas