Last updated: 11:55 / Thursday, 31 July 2014
Opinion by Henderson

World Cup Economics – A Latin American Take

World Cup Economics – A Latin American Take

With the dust settling on the 2014 World Cup, we thought it would be an opportune time to contrast the performances of some of the teams in South America with the outlook for their stock markets.

Starting with the host nation Brazil, in the run-up to the World Cup there was much concern regarding Brazil’s ability to stage such a big event, with numerous headlines about infrastructure failures and stadium delays. In contrast, there was much hope and expectation that the host nation would cement its footballing supremacy over the rest of the world by winning on home turf. The reality was quite the opposite. The country has been praised for the smooth running of the tournament but the football team’s humbling at the hands of the Germans highlighted that Brazil is no longer the dominant force that it once was in world football. Similarly, an economy that was once touted as one of the most dynamic in the world has been stuck in a rut.

Much of the blame for the football team’s performance has fallen on the team’s manager, who has already been forced to resign, and many point the finger at President Dilma Rousseff for the weak economy and hope that she could receive a red card at the presidential elections that are due in October. A decline in the president’s approval ratings in recent months has coincided with a rally in the stock market as both alternative candidates are favoured by investors. Indeed such is the love of the beautiful game in Brazil that many believe the failure of the football team will have a direct impact on Dilma Rousseff’s election prospects. Although it is a fool’s game to predict the final outcome, the pressure is clearly mounting on the current government and hence whatever the final result, a shift towards more market-friendly policies appears inevitable. Having consistently underperformed for the last four years, this will give further momentum to Brazil’s recent rally.

The Mexican football team struggled in qualifying for the tournament and although they were knocked out in the second round, their performances were that of a team on the rise. The economy itself has also struggled in the past year, as the change in government led to a slowdown in state spending and tax increases held back the consumer. In the second half of the year, growth should accelerate and with President Enrique Peña Nieto having made huge progress in implementing wide-ranging reforms, the long-term outlook for the economy and the equity market is clearly on the right trajectory as well.

One of the surprise packages of this year’s World Cup was Colombia. Los cafeteros won many fans with their exciting brand of football and there are many reasons to be excited about the outlook for the Colombian stock market too. The recent presidential election was won by the incumbent, giving him a mandate to continue his pursuit of a peace agreement with the FARC guerrillas. Easing security concerns and greater integration with the world economy has already led to accelerating growth for the regions’ third most populous country. Infrastructure investment is poised to augment this and could make the Colombian stock market the surprise package of Latin America.

Elsewhere, Chile’s footballers surpassed expectations and were very unlucky not to knock out Brazil. However, with a new government imposing fiscal reform, the short-term outlook for Chilean equities appears challenging. Uruguay’s economy has been performing well but this is a peripheral market with little for investors to sink their teeth into. Costa Rica showed resilience on the football field and reminds us that the countries of Central America, although small, present growth opportunities for many Latin American companies.

Finally, Argentina’s team fell just short of the big prize but were the best performing South American team. Similarly, the country’s stock market has been the best performer in the region this year and with the prospect of political change in 2015 and a move to settle conflicts with sovereign debt holders, investors are re-evaluating the long-term potential of Argentina. Supported by cheap valuations, the stock market rally is likely to continue. We do caution though that the economic situation can only be described as…. Messi.

At the end of the day, although the region’s football teams experienced mixed results at the World Cup, the outlook for the region’s stock markets has significantly improved. Political change in Brazil, economic acceleration in Mexico and Colombia, a more benign than expected impact from the US Federal Reserve’s tapering policy and attractive valuations lead us to conclude that investors should be careful not to be caught offside in Latin American equities.

Authored by Nicholas Cowley, Investment Manager, Global Emerging Markets, Henderson Global Investors