This edition of CIO Weekly Perspectives comes from guest contributor Gorky Urquieta of Neuberger Berman’s Emerging Markets Debt team.
It is spring in the southern hemisphere, which makes it all the more tempting to slap the “Lat-Am Spring” label onto South America’s wave of social unrest and political volatility, recalling the “Arab Spring” protests of 2011.
But do recent events in the region really have anything in common?
Latin America’s economic growth was weak in 2018 and has been flat this year; meanwhile the rest of the emerging world has been growing, at a rate of 5.3% in Asia, 2.2% in emerging Europe and 3.3% in Africa.
Then again, while the economies of Argentina, Ecuador and Venezuela are shrinking, others that are experiencing political upheaval, such as Bolivia, Chile and Peru, are growing at a rate of 2.5 – 4.0%. The region’s two biggest economies, Brazil and Mexico, are not growing, but remain unaffected.
If economics alone don’t explain what’s going on, perhaps ideology does? Are these events a common lurch to the extreme left or right? Or a revolt against populism?
Apparently not. While Argentina moved to the left in its recent election, next door in Uruguay a center-left coalition that ruled the country for 15 years has been narrowly voted out in favor of the center-right. We reject the notion that we’re about to witness a region-wide phenomenon similar to the “Washington consensus” reforms and privatizations of the 1990s or the “pink tide” of left-leaning politicians that came to power on the coattails of the early 2000s commodity boom.
Diversity of Issues
A quick tour of the region illustrates the diversity of issues at play.
In Argentina, an incumbent pro-reformist was voted out, but still held onto 41% of the vote despite a second year of deep recession. Many remain supportive of reforms, notwithstanding the pain involved. In Bolivia, an increasingly authoritarian, left-wing incumbent has been removed following a largely peaceful uprising against apparent electoral fraud.
In Chile, a modest adjustment in metro fares led to a series of organized, violent protests that have broadened into large but peaceful protests for better services, economic reform and a new constitution. The center-right President’s low ratings haven’t helped, but his socialist predecessor was just as unpopular, if not more so, when she left office in 2018.
In Colombia, labor unions and students are protesting pension and tax reforms that the right-wing government insists won’t be pursued without prior consultation. However, these protests have expanded to take in alleged corruption and recriminations over the 2016 peace agreement with FARC rebels.
In Ecuador, violent protests greeted spending cuts and the removal of fuel subsidies under an IMF-backed reform agenda adopted by the center-left government, which has managed to hold onto power. Peru’s centrist President was able to avert a constitutional crisis by calling for widely supported parliamentary elections, dissolving a congress that had attempted to impeach him.
The headlines are all being generated by Andean countries, but we think it’s safe to assume that’s a coincidence. The only common themes we can identify are general anti-incumbent sentiment (regardless of political color), and the tendency for protest against a specific issue to morph into frustration over corruption, crime, stagnation and inequality—patterns that Brad Tank identified in his post about global political risk last week.
So what might all this imply for market risk and potential contagion?
We have seen short-term dislocations across the region as the seemingly endless stream of negative news came in, and a layer of added risk premium is now attached to most markets. Nonetheless, by and large, the markets have been fairly discriminating in pricing risk. Weak growth has added to fiscal pressures and increased vulnerability to external and domestic shocks, but buffers exist in the form of flexible and floating currency regimes and diminished reliance on external markets for public sector funding.
It is important also to note that, with the unfortunate and glaring exception of Venezuela, all of the issues that have come up so far have been addressed democratically and constitutionally. Latin America’s institutions are largely working, and that is positive.
In short, this is not so much a “Lat-Am Spring” as a ripple of discontent. We do not fear a 1980s-style “lost decade” for the region. Heightened volatility and uncertainty are likely to persist for now—and it would be wise to look out for potential contagion—but we are still navigating these agitated waters by focusing on underlying fundamentals country by country.
In Case You Missed It
- S&P Case-Shiller Home Prices Index: September home prices increased 0.1% month-over-month and increased 2.1% year-over-year (NSA); +0.4% month-over-month (SA)
- U.S. Consumer Confidence: -0.6 to 125.5 in November
- U.S. New Home Sales: -0.7% to SAAR of 733,000 units in October
- U.S. Durable Goods Orders: +0.6% in October (excluding transportation, durable goods orders increased 0.6%)
- U.S. 3Q 2019 GDP (Second Estimate): +2.1% annualized rate
- U.S. Personal Income & Outlays: Personal spending increased 0.3%, income decreased 0.1%, and the savings rate increased to 7.8% in October
- Euro Zone Consumer Price Index: +1.0% year-over-year in November
What to Watch For
- Monday, December 2:
- Japan Purchasing Managers' Index
- China Purchasing Managers' Index
- ISM Manufacturing Index
- Euro Zone Purchasing Managers' Index
- Wednesday, December 4:
- ISM Non-Manufacturing Index
- Thursday, December 5:
- Euro Zone 3Q2019 GDP
- Friday, December 6:
- U.S. Employment Report
Statistics on the Current State of the Market – as of November 29, 2019
|S&P 500 Index||1.0%||3.6%||27.6%|
|Russell 1000 Index||1.1%||3.8%||27.7%|
|Russell 1000 Growth Index||1.6%||4.4%||32.4%|
|Russell 1000 Value Index||0.6%||3.1%||23.2%|
|Russell 2000 Index||2.3%||4.1%||22.0%|
|MSCI World Index||0.8%||2.8%||24.6%|
|MSCI EAFE Index||0.5%||1.1%||18.8%|
|MSCI Emerging Markets Index||-0.8%||-0.1%||10.6%|
|STOXX Europe 600||0.8%||1.6%||19.8%|
|FTSE 100 Index||0.4%||1.8%||14.1%|
|CSI 300 Index||-0.6%||-1.5%||30.1%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.0%||-0.1%||3.2%|
|Citigroup 10-Year Treasury Index||0.0%||-0.7%||10.0%|
|Bloomberg Barclays Municipal Bond Index||0.2%||0.3%||7.2%|
|Bloomberg Barclays US Aggregate Bond Index||0.2%||-0.1%||8.8%|
|Bloomberg Barclays Global Aggregate Index||0.0%||-0.8%||6.2%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.2%||0.7%||8.8%|
|ICE BofAML U.S. High Yield Index||0.4%||0.3%||12.0%|
|ICE BofAML Global High Yield Index||0.5%||0.3%||11.3%|
|JP Morgan EMBI Global Diversified Index||0.2%||-0.4%||12.8%|
|JP Morgan GBI-EM Global Diversified Index||-0.9%||-2.1%||8.7%|
|U.S. Dollar per British Pounds||0.8%||0.0%||1.6%|
|U.S. Dollar per Euro||-0.1%||-1.2%||-3.5%|
|U.S. Dollar per Japanese Yen||-0.8%||-1.3%||0.2%|
|Real & Alternative Assets|
|Alerian MLP Index||-1.7%||-5.8%||-1.8%|
|FTSE EPRA/NAREIT North America Index||1.7%||-1.5%||25.7%|
|FTSE EPRA/NAREIT Global Index||1.3%||-0.9%||21.6%|
|Bloomberg Commodity Index||-2.0%||-2.6%||2.5%|
|Gold (NYM $/ozt) Continuous Future||0.6%||-2.8%||14.9%|
|Crude Oil WTI (NYM $/bbl) Continuous Future||-4.5%||1.8%||21.5%|
Source: FactSet, Neuberger Berman.