South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
Brazilian financial assets delivered stunning returns last year. The Bovespa stock index rose some 40 per cent, with another 20 per cent US dollar gain on top. This year has shaped up nice too, so far. Brazilian stocks are up another nine per cent, while the real has risen by four. Such gains far outstrip the other great American “reflation trade”, where US stocks have powered ahead thanks to Donald Trump’s corporate tax cutting plans. The S&P 500 is up nine per cent last year and five per cent in 2017 – although the US rally, lately, has wilted. Might this week mark the top of the Brazilian market as well?
There are good reasons it might. On Wednesday, the Ides of March, Brazilian labor unions and leftist political movements took to the streets in protest over President Michel Temer’s proposed pension reform – one of the main drivers of the market rally. Furthermore, on Tuesday, Rodrigo Janot, the Brazilian prosecutor-general, threw a cat among Brasilia’s pigeons. He filed to indict 83 lawmakers on charges stemming from the Odebrecht and Lava Jato corruption scandals. None of those lawmakers have yet been publicly named. But the list is thought to include just about every major politician to have occupied power over the past decade.
The prospect of sustained or rising street opposition to the pension plan is one worry for the government’s reform agenda, and thus investors. In addition, politicians in Brasilia are increasingly uncertain where to turn to best save their skins from the corruption probes. The dilemma is binary. Should they back the pension reform in the hope of private sector support plus a stronger economy ahead of the 2108 presidential elections? Or should they reject it, and so win more immediate popular support instead?
Either way, this week’s combination of events heralds bumpy times ahead for both the government’s reform agenda and the market rally. Eurasia Group, the consultancy, warns that “a stand-off has the potential to unsettle markets, and could well lead to spike in the dollar, a drop in the stock market, and economists stating in the press that the economic recovery is at risk.” Time to take profits on this reflation trade too?
The Mexican peso rallied sharply on Wednesday after Peter Navarro, Donald Trump’s top trade advisor, softened his usual sharp criticism of Mexico and Nafta, saying he envisioned a North American manufacturing “powerhouse” that included the US, Canada and Mexico.
Video of the week
If the customer really is always right, the release this week by Walt Disney studio Pixar of its latest animated feature is a true sign of US-Mexican times. “Coco” tells the story of a small boy, Miguel, captivated by the musicianship of a dead guitar player, Ernesto de la Cruz. “It’s a love letter to Mexico,” said the film’s director, Lee Unkrich.