After Mexico’s president-elect, López Obrador, announced that he plans to scrap the most important infrastructure project of the past two decades – the New Mexico City International Airport, the peso had one of its worst days since President Trump’s election and the stock market, which fell 4%, had its worst close in a decade.
According to JPMorgan Chase & Co which lowered its expectations for Mexico, the decision (which followed the mandate of the referendum held on the issue, with minimum participation -only 1,067,859 votes, or less than 1% of the Mexican population), “left investors worried about how he would manage the economy and increases the probability of the central bank raising interest rates.”
Morgan Stanley also reacted by changing its preference of exposure to that country from an overweight to an underweight position due to “the short-term asymmetric risks associated with the free trade agreement with the US and the airport situation.”
According to UBS the issue seems even riskier, since they warn that this dynamic could be used to carry out material changes in Mexico, such as invalidating “effective suffrage, not re-election” or even the central bank’s autonomy. “We see the potential for a public referendum to be approved as a constitutionally valid way of enforcing changes in the future, including possibly extending the six-year presidential mandate. The use of reserves at the central bank (Banxico) could also be subject to the people’s choice,” they point out in the attached report.
AMLO, who will not be sworn into office until December 1st, stated that after the public consultation, “our decision is to obey the referendum mandate, so two runways will be added to the military airport at Santa Lucia, the current Mexico City airport will be improved, and the Toluca airport will be upgraded, so that shortly we will have solved the saturation in Mexico City’s current airport.” The politician also commented that, “in economic terms, with this decision the Federal Government is going to save, around 100 billion pesos.” Just with the change in capitalization value due to Monday’s fall, Mexican companies lost 17 billion dollars, or more than 341 billion pesos. This means that in just one day, they lost more than three times the savings promised by AMLO.
Meanwhile, President Enrique Peña Nieto informed that Grupo Aeroportuario de Ciudad de México, or GACM, the company in charge of the New International Airport of Mexico (NAIM) project, will continue working on the construction of the new terminal in Texcoco at least until his last day in office, November 30th. Whereas, Juan Pablo Castañón, President of the (CCE), or Business Coordinating Council, said that the consultation lacks legal fundamentals in order to be accepted and warned that if after December 1st the stance continues to be to halt the Project underway in Texcoco, stakeholders will undertake legal actions in defense of the Project, and “in favor of Mexico’s economic development.”
The President, Enrique Peña Nieto, also warned that if the airport is canceled, the next government will have to comply with all its contractual and financial obligations, which includes advancing airport bond payments. According to AMAFORE, Afores investments in the NAICM are assured: “Workers must be calm about their savings, since the instruments used by the Afores for this investment, Fibra-e and Bonds, are backed by the collection of the TUA (Airport Use Fee), that is, by the flow of passengers, so the investment of their savings has enough guarantees to recover the capital plus a yield higher than inflation,” the organism said in a statement.
Wikimedia CommonsFoto: Pxhere CC0. Adapting To Markets That Change At The Speed Of Moore’s Law
Written by Rick Rieder, BlackRock Chief Investment Officer of Global Fixed Income and Portfolio Manager of the BGF Fixed Income Global Opportunities Fund
Published September 26, 2018
Rieder and Brownback argue that today investors are confronted by massive shifts in the nature of the economy, alongside cyclical and policy uncertainties; making sense of it all is critically important.
Moore’s Law, which states that computer processing speeds should double roughly every two years, proved to be true for a generation and helped to catalyze historical, technological, and social change, as well as remarkable productivity and economic growth. Today, however, new processing-intensive operations have challenged the law’s durability. Fortunately, the revolutionary emergence of parallel-processing chips has created a vast new dimension of computing capability – essentially computer chips that can now multi-task. Thus, simultaneous processing of massive and differentiated data inputs is possible, which has colossally accelerated the evolution of numerous cutting-edge innovations, such as artificial intelligence and autonomous driving, to name but a couple of the higher-profile examples. Similarly, successful investing today requires an ability to look past simple hyperbolic headlines and concurrently process and prioritize numerous thematic influences, many of which are historically unprecedented and are likely underappreciated by conventional wisdom.
From manufacturing to services; Tangible to intangible
High atop our thematic list is the evolving dominance of the “intangible economy” that has radically altered global consumption and investment behaviors, and which is fascinatingly depicted in the recent work by Jonathan Haskel and Stian Westlake, Capitalism Without Capital: The Rise of the Intangible Economy(Princeton, 2017). Ubiquitous human connectivity has dramatically elevated the relevance of digital intangible assets (data, applications, brands, etc.) and given rise to a frenzied corporate focus on their aggregation and monetization. In turn, this is engendering massive amounts of research and development spending, and investment in intangible assets, like social media platforms, apps, etc. that cater to consumers and in many cases hold transformational impacts on the global economy. At the same time, tangible asset investment has long been in decline (see graph).
Attempting to value the “capital stock” of digital intangible assets is an imprecise endeavor because the specific pecuniary impacts are difficult to quantify. Consumers are just beginning to understand that data created from their use of intangible products has realizable intrinsic value. For companies, the value of intangible assets are only reflected on balance sheets via acquisitions, or by backing them out from market capitalizations. But the overall societal benefits of proliferating intangible assets are unambiguous. Many corporations now generate enormous cash flows with a stock of ever fewer physically tangible assets. Systemic inventory management has become highly efficient, which reduces the amplitude of the macro economic cycle. Moreover, pervasive connectivity fosters intense price competition that places a secular downward pressure on global inflation rates, a broad and vital positive for the household sector.
Inflation, The Fed and the U.S. Dollar
Another theme worth monitoring is the muddled cyclical inflation outlook and possible policy responses. Specifically, weighty components to the Consumer Price Index, such as energy and shelter, face headwinds associated with steep base effects. Conversely, widespread tariffs would produce an obvious cyclical inflationary shock, just as many industries already face onerous capacity constraints that risk evolving into cost-push type price increases. In total, while markets are fearful of accelerating inflation, we think the Federal Reserve will look through the cyclical noise in deference to longer-term secular constraints.
Instead, we think policy makers will rightly focus on rate hike ramifications for real-economy activity while seeking a nebulous policy neutrality. With solid U.S. growth momentum, the risk of a tightening-induced recession is low at this point, but collateral damage from excessive tightening is very possible. Already, some debt-financed sectors like housing are showing nascent signs of diminished activity. Moreover, the prominent loan market will become exposed to rates that rise above the preset floors embedded into most outstanding loans. Finally, as the U.S. economy becomes more dominated by rate-insensitive, intangible-heavy businesses, extreme Fed rate adjustments away from neutral (up or down) will unfairly penalize very specific economic constituents, like savers and homeowners.
An underappreciated corollary to persistent Fed tightening is U.S. dollar strength (USD), especially when such hawkishness runs counter to the policy stance of other developed market (DM) central banks, as is the case today. Generally speaking, a stronger USD can disrupt the global financial system by tightening USD funding and reflexively lowering non-U.S. economic growth. And, when global liquidity growth slows sharply, as it has this year, U.S. dollar strength exacerbates the onerous consequences already accruing to liquidity-dependent global borrowers. That phenomenon has been visibly evident during 2018, with rolling emerging market (EM) crises posing a widening risk of broader contagion.
Asset Allocation amid growing uncertainty
Divergent financial market influences are equally complex. First, investor conviction has plummeted, severely diminishing market liquidity just as persistent volatility short selling is driving DM implied volatility to new lows. Combined, those two factors represent a systemic vulnerability with potential for forced unwinds into precariously thinly-traded markets. Simultaneously, credit spreads reside at cyclical tights, reflecting robust cash flow-driven leverage metrics. But the emergence of intangible assets means any cyclical decline in systemic cash flows can dent credit metrics rather faster than historical experience, since there are fewer tangible assets to serve as a collateral cushion. Another evolving dynamic is the efficacy of duration as a reliable risk hedge. While historically dependable, hedging with duration has been a counterproductive tool so far this year, but we think that the resumption of disinflationary forces and a full market pricing of near-term rate hikes suggest that risk parity, via short- and medium-dated U.S. Treasuries can be useful again for the remainder of 2018.
In sum, we find that while the range of potential forward scenarios has widened this quarter, the likelihood of a negative outcome has risen meaningfully. Accordingly, we are exploiting highly attractive short-dated fixed-income assets for carry and convex duration, specifically U.S. Treasuries, securitized assets, investment-grade credit, and DM sovereigns swapped to U.S. dollars. We’re staying exposed to equities though cheap upside gamma. Moreover, given the carnage witnessed in recent months in EM debt markets, we’re also layering in hard-currency expressions, and remain long the U.S. dollar as a systemic hedge. Investors today must understand the massive long-term changes taking place in the economy, alongside the cyclical economic fluctuations within them. They must also contend with an increasingly opaque monetary policy path for the year ahead, so we think maintaining a fair degree of caution makes sense, and it positions one well to take advantage of future opportunities.
In Latin America and Iberia, for institutional investors and financial intermediaries only (not for public distribution). This material is for educational purposes only and does not constitute investment advice or an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund or security and it is your responsibility to inform yourself of, and to observe, all applicable laws and regulations of your relevant jurisdiction. If any funds are mentioned or inferred in this material, such funds may not been registered with the securities regulators of Argentina, Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain Uruguay or any other securities regulator in any Latin American or Iberian country and thus, may not be publicly offered in any such countries. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx. The securities regulators of any country within Latin America or Iberia have not confirmed the accuracy of any information contained herein. No information discussed herein can be provided to the general public in Latin America or Iberia. The contents of this material are strictly confidential and must not be passed to any third party.
Wikimedia CommonsCourtesy photo. High Yield: The End Of The American Dream?
Traditional fixed income investors do not usually like interest rate hikes. As rates go up, the prices of their bonds go down and they reap negative returns in their portfolios. This is where the poorly advised investor learns that fixed income is far from fixed. Only those who maintained liquidity in a large portion of their portfolios will welcome the new opportunities arising from investing at higher rates. But is this anxiety surrounding the rate hikes shared across all asset classes in fixed income? In the case of high yield bonds the higher rates could be a positive thing (if the increases reflect an expanding economy) or a negative thing (if there is a fear that these rate hikes may end up causing a recession).
To date, despite episodes of volatility in the markets, high yield has generally benefitted from the strength of the US economy, the growth in corporate earnings and the low default rate. In spite of the downturn that we have seen so far in October, the high yield indices are still in the black since the beginning of the year, in contrast to the losses seen in the investment grade indices. Without indulging in a simplified generalisation that blurs the distinctions between the many subgroups and components that make up the high yield class, of all the sectors with a weighting of over 3% in the benchmarks, only Homebuilders are wider (note that at the beginning of the year, it was trading very tight).
The high internal cash-flow generation within this asset class has brought a slower rate of new issue origination, which has also been a determining factor in the good performance of high yield. Most new issues this year have been assigned to refinancing the existing debt. There has also been an improvement in credit ratings for new issues, leaning more towards BB bonds and with fewer CCC issues. Credit fundamentals remain strong. Rating upgrades surpass downgrades in the highest ratio since 2011. The rate of defaults within the high yield class is around 2%, compared with a historical average of 5%.
Furthermore, we must not underestimate the increasingly frequent demand from investors who were traditionally focused only on investment grade bonds, such as pension funds or wealth managers, who are incorporating BB tier issues into their portfolios. These investors are not merely “opportunistic tourists”, but rather they are investing in a systematic manner with a view to improving the diversification of their portfolios.
The NAFTA is no longer one of the risks weighing down this asset class. We are left with China, oil, a possible acceleration in inflation and the deficits. So, does this mean the end of the American dream enjoyed by high yield? Historically speaking, high yield bonds have had a negative correlation with Treasury bonds. History also teaches us that credit spreads can remain below average for long periods of time, particularly during periods of positive economic growth and low default rates.
Given the current outlook, in the short term, we do not believe the economic situation will take a turn for the worse towards a recession, which would create a negative credit environment. Although the credit spreads for high yield indices are at low levels from a historical perspective and, in our opinion, there is limited potential for capital appreciation, the coupon offered is sufficiently attractive relative to other assets to justify waiting patiently with a portion of the portfolio invested in high yield bonds. Of course, we cannot rule out a widening of spreads in the short term, caused by a defensive movement and the profit taking in a volatile market if stocks sell off. But this would not be the result of panic selling due to a continuous deterioration of fundamentals.
Wikimedia CommonsFoto: Federal Reserve. October Spectra: Get Out Of Equities Or Probe The Entry?
The leaps made by the stock market indices Dow Jones (DJI), S&P 500 (S&P), Nasdaq Composite (NASDAQ) and Russell 2000 (RUT) on October 15 and 16, seems more like technical reactions due their fall to the 200 day moving average (MA) than signs of recovery.
Benchmarks fell at a mean of 8.60% from their recent all-time highs (RUT, -11.26%; NASDAQ, 9.60; S&P, -6.93%; DJI, 6.62%). RUT continued dropping 4.7% beyond that MA, was the only index that touched and trespassed the MA 300 line and, in proportion, the third in rebound magnitude. What could we understand and wait?
It is October, guys, and you cannot get enthused. Since we have well clear the reasons for the downfall –overprices, continuing hikes of fed funds rate, uncertainty about Brexit, economic and political storm-clouds over the EU, trade menaces, etc. –, and assimilated enough that they will not be resolved neither in the short nor in the medium term, even with the palliative of quarterly reports, it is hard to accept that the increases of those days mean a quick return to historical highs. Technical indicators suggest there are room for additional downs, given the indices didn´t reach the over-sale area. Rebounds could be taken as a breath in the downfall or as a symptom of stagnation.
Judging by the cumulative returns in five, three, one year (from closing to closing of each September) and YTD, it is reckoned understandable that a profit taking, more substantial than previous ones, was intuited or drawn for months. Take a look to these rounded figures:
Historical lessons of October
MexBol IPC index flirted the threshold of 50,000 points in August and September and finally fell in this streak somewhat less than Wall Street references. Therefore, its positive reaction has been tepid, precisely up to the 200 MA line, without shaking the bearish bias. Still, it has left in two weeks half of the points it had won in four months. Needless to say, its performance has been poor: loss of 1% in one year; gain of 1% YTD.
If we review the behavior of the stock markets in others cycles of FED Funds rate increases, we would see that the pattern of the turn to the upside requires not less than a semester. On this occasion, it would be warned: as long as the results contribute and the other elements do not run aground. Of course, the pattern involves rises and relapses that, this time, if occurred, they would coincide with the crossing from and to the 300 MA, which could be bad for many but interesting for some. If we abide by technical signals, we will assume that this PM marks a harder and decisive floor for Wall Street: if reached and validated, the rebound could inject confidence; if breaks, be careful…
In any case, if the decrease becomes pronounced or laterality happens, the histories of October and the stepped rise of Fed Funds rates would allow to deflate prices and enter the market at attractive levels. Here lies the interesting thing.
Pixabay CC0 Public Domain. Japan’s “Show Me the Money” Corporate Governance: 3Q update
Japan has overtaken Singapore to claim the top spot on the 2018 Henley Passport Index, having gained visa-free access to Myanmar earlier this month. Japan now enjoys visa-free/visa-on-arrival access to 190 destinations, compared to Singapore’s total of 189. Japan and Singapore have been neck and neck on the index since they both climbed to 1st place in February — following a visa-exemption from Uzbekistan — and pushed Germany down to 2nd place for the first time since 2014.
This quarter, Germany has fallen further to 3rd place, which it now shares with South Korea and France. France moved up from 4th to 3rd place last Friday when it gained visa-free access to Uzbekistan, while South Korea moved from 4th to 3rd place on 1 October when it gained visa-free access to Myanmar. Germany, France, and South Korea all have a visa-free/visa-on-arrival score of 188. Iraq and Afghanistan continue to hold the bottom (106th) spot of the Henley Passport Index, with only 30 destinations accessible to their citizens.
The US and the UK, both with 186 destinations, have also slid down one spot — from 4th to 5th place — with neither having gained access to any new jurisdictions since the start of 2018. With stagnant outbound visa activity compared to Asian high-performers such as Japan, Singapore, and South Korea, it seems increasingly unlikely that the US and the UK will regain the number 1 spot they jointly held in 2015.
Russia received a boost in September when Taiwan announced a visa-waiver for Russian nationals (valid until July 2019), but the country has nonetheless fallen from 46th to 47th place compared to Q3, because of movements higher up in the ranking. The same is true of China: Chinese nationals obtained access to two new jurisdictions (St. Lucia and Myanmar), but the Chinese passport fell two places this quarter, to 71st overall. This is still an impressive 14-place improvement over the position that China held at the start of 2017.
What has been most remarkable in recent years is the UAE’s stunning ascent on the Henley Passport Index, from 62nd place in 2006 to 21st place worldwide currently. The UAE now holds the number 1 passport in the Middle East region.
Christian H. Kälin, Group Chairman of Henley & Partners, commented on these developments: “The Henley Passport Index, which is based on exclusive data from the International Air Transport Association (IATA), is an important tool for measuring not only the relative strength of the world’s passports but also the extraordinary results that states can achieve when they work hand in hand with their global peers to build a more interconnected and collaborative world. China and the UAE exemplify this kind of progress, with both states among the highest overall climbers compared to 2017, purely as a result of the strong relationships they have built with partner countries around the world.”
Pixabay CC0 Public DomainPhoto: AMAFORE. Afores will Have to Wait in Order to Invest in International Mutual Funds
It had seemed that the beginning of 2018 would mark a big milestone in the way the Mexican Pension Plans, or Afores, invest. At the end of 2017, the ‘Comisión Nacional del Sistema de Ahorro para el Retiro’ (CONSAR), or National Commission for the Retirement Savings System decided, among other things, such as making CERPI more flexible or including SPACs, to include Mutual Funds with active strategies as an additional investment vehicle. This decision was published in the official bulletin in January 2018.
As Carlos Ramírez, President of the CONSAR, commented, “When looking to invest with an international asset manager, we look for better yields and this is what we have seen with the mandates that have paid a good return… Mutual funds are a reflection of the mandates and what we are really doing is opening another option for investing abroad, especially with the small and medium Afores in mind.”
However, in a recent interview with Funds Society, which will be available in the printed magazine this October, Ramírez commented that, unfortunately, this resolution has as yet not been implemented waiting for its authorization in a pending CAR, or Risk Committee meeting, “which would formally give life to mutual funds, and which to date was unable to be held for various reasons. I hope it can be achieved before the end of the administration so that we can see closure on an issue that we have been working on for a long time, which is a very deep analysis of the benefits of Afores being able to invest in mutual funds, and which we hope to be able to complete before this administration ends. It‘s practically ready, all that’s missing is that CAR meeting.”
Meanwhile, Carlos Noriega Curtis, President of AMAFORE, told us prior to the Third Afores Convention that this meeting will most likely not go ahead until the next administration is in power: “If during the transition stage, within the next two months, there is communication between the incoming and outgoing governments, the CAR will meet, if not, it will meet as soon as it is able to do so following the transition.” The executive added that they are watching very closely how the situation develops. “All the information has been prepared. We, as an association, have been supporting the importance, the necessity, and the convenience of being able to invest in mutual funds… we are convinced of this, and we are doing everything possible to achieve it,” concluded Noriega.
CC-BY-SA-2.0, FlickrPhoto: CASCAID Americas. Asset and Wealth Management Firms Join Forces With CASCAID Americas
CASCAID Americas is another example of the industry turning its attention to supporting others. It’s an initiative set up in 2017 in UK that brings the asset and wealth management community together to raise money for charities.
What is CASCAID Americas all about?
It’s really about bringing people together to support great causes whilst enjoying networking. It’s led by 30-40 Ambassadors – people from around the industry. Ambassadors range from CEOs of asset and wealth management firms to new graduates and Investment 2020 trainees.
On a practical level, Funds Society, with the help of MiP in the UK, sits at the heart of it, helping to organize events and with all the logistics (on a pro bono basis of course).
How do you raise money?
In any way we can think of! We will have one gala at the end of the fund raising period (June 2019), which is supported by investment firms. This can raise significant sums. Then we have other group events such as a darts evening, fun runs, wine tastings and sporting tournaments. And Ambassadors (and others) also do their own challenges – these are wide-ranging, from running marathons, to swimming lakes, to walking thousands of miles. Anything goes!
What charities do you support?
In 2017, CASCAID UK raised money for Cancer Research UK. The target was £1 million but it managed to exceed £2.35 million. For CASCAID Americas, based on the much smaller size of the offshore industry, we are setting an initial goal of US$150k, though we actually hope to beat our British counterparts, at least on a relative basis. For the 2018-2019 campaign CACSCAID Americas is raising funds for The SEED School of Miami. It’s important to remember that all monies go direct to SEED Miami – CASCAID Americas isn’t a charity itself, it’s just a brand name that acts as an “umbrella” to bring all our activities together.
Why The SEED School of Miami?
We want to help local charities with a strong social impact in our community. The SEED School of Miami definitely fits that bill – as South Florida’s only public, college-preparatory boarding school, it impacts on the lives of the 210 young under-resourced students that are currently enrolled in the program, who spend 24 hours a day in a safe, structured and predictable environment from Monday to Friday —three healthy meals a day; consistent relationships with excellent role models; daily academic challenge and support; and extensive programs in athletics, visual and performing arts, and service. The national results for the SEED schools program speak for themselves. 90% of the students enrolled in 9th grade graduate high school; 93% of these student attend college with full scholarships, and 80% of these students are first generation college-bound students in their families
Pixabay CC0 Public DomainPhoto: Abanca. Abanca to Open an Office in Miami Before the end of 2018
Abanca has obtained the license from the Federal Reserve of the United States (Fed) to open an office in Miami and operate in the United States.
The license that comes into the project after a year of work enables the Spanish bank to develop total activity with companies and non-residents and, in certain circumstances, to develop activities with residents of average and high incomes. Miami is a city with a large presence of Latin American, Spanish and Portuguese non-residents, groups that will focus on Abanca’s growth strategy.
With this new opening, the firm’s objective is to continue to grow in markets with high potential and, as in the case of Portugal, in the company segment and medium and high income.
The Miami office, located in the Brickell financial zone, will open before the end of 2018 and will have 12 employees, four Spanish and the rest of the United States.
Abanca is present through representations in Brazil, Mexico, Panama, Venezuela, France, Germany and the United Kingdom. In addition, the entity has centers in Portugal, with its own bank card and Switzerland, where we have offices with both modalities.
Pixabay CC0 Public DomainPhoto: James Ross (right) Tim Stevenson (left) . Tim Stevenson, To Retire From Janus Henderson
After 32 years with Janus Henderson Investors, Tim Stevenson, Director of Pan European Equities, has decided to retire from the industry. According to the company, Tim will remain with the team on a transitional basis through the first quarter of 2019.
James Ross, his co-manager on the Janus Henderson Horizon Pan European Equity Fund will continue to manage the fund. “The fund will follow the proven strategy that has delivered success over the long term by investing in high quality European companies. The investment process and objective will not change.”
James has worked directly with Tim co-managing Pan European Equity portfolios since August 2016 and has worked alongside him as a member of the European Equity Team for many more years in an earlier role as a UK equity fund manager. James Ross has 11 years of financial industry experience and holds the Chartered Financial Analyst designation.
Stevenson says: “James has impressive enthusiasm for, and knowledge of, the companies and the opportunities that exist from investing in Europe. The job of the European fund manager requires energy, brains, determination and skill. James has all of these and I am so pleased that he is taking on the full responsibility of looking after clients’ money in the complex but exciting area of Europe. I want to take this opportunity to wish him the very best of luck, and to thank clients for their support and patience over so many years. Finally, I would like to also thank all the great colleagues with whom I have worked in my career at Janus Henderson.”
Ross says: “I have thoroughly enjoyed working alongside Tim for the last few years; I am excited at the prospect of taking over sole responsibility for our mandates after his retirement. Tim will leave behind a legacy of consistent value-creation for clients; a record that I will seek to emulate.”
“We wish Tim well with his retirement and look to James and the wider European equity team to help build on his long-term success. If you have any questions about this announcement or any other investment-related queries please speak to your usual Janus Henderson representative.” The company concluded
CC-BY-SA-2.0, FlickrPhoto: Nicolas de Camaret. No More Samba in Brazil
Jair Bolsonaro has come out in the lead in the Brazilian presidential elections with 46%. Looking beyond his very divisive views on certain issues in Brazilian society (status for women, LGBT), on the Paris Agreement and the corruption of previous governments, along with his aim to end Brazil’s endemic violence by allowing Brazilians to take up arms, are there any economic foundations for his likely victory? (see here the Brazilian context of these elections) This victory has very clear economic explanations. The Brazilian economy has been suffering since 2014 and the collapse in commodities prices. The recession over 2014-2015 and 2016 lasted a very long time, and was followed by a lackluster recovery, which was more of a stabilization than a real rebound. GDP in the second quarter of 2018 still fell 6% short of the 1Q 2014 figure.
This drastic situation can be attributed to two factors. The first is the country’s high dependency on commodities. Brazil enjoyed a very comfortable situation at the start of the current decade when China became its primary trading partner. Opportunities increased and commodities prices soared, so revenues were buoyant and did not encourage investment, creating a phenomenon known as Dutch disease, whereby commodities revenues were such that there was no incentive to invest in alternative businesses. But when Chinese growth began to slow and commodities prices took a nosedive, the Brazilian economy was unable to adapt, so it seized up and plunged into a severe recession.
The other factor is that Brazil devoted hefty financial resources to financing the football World Cup in 2014 and then the Olympic Games in 2016, so in a country with a massive current account deficit, this put a lot of pressure on financing. Funding for public infrastructure replaced investment in production, thereby making the country’s Dutch disease even worse. The Brazilian population has paid a high price for the country’s brief moment of glory.
Yes – the job market contracted and inflation stepped up, and if we look at the Markit survey indicator, employment has not returned to 2015 levels, especially in for services, while jobs have stabilized in the manufacturing sector over the past year, albeit at a low level. So Brazilians are still paying for the recession
What can we expect for the Brazilian economy in the short term?
The Brazilian economy is still very shaky and the latest surveys suggest that recessionary risk remains high. More broadly speaking, the slowdown in the world economy will not help drive economic momentum, while in the commodities sector, only oil prices are on an upward trend. The new president has a tough job ahead as the country has very high expectations, but Brazil is not the US: it is no longer a powerful economy and must first rebuild, which will be a long drawn-out process. There is a risk that change will not be fast enough to keep Brazilian voters happy at a time when the authorities are also taking a tougher line to maintain law and order.
