The political winds of change in Latin America
The political map in Latin America is undergoing something of a change. Once a bastion of far-right politics, dominated by the likes of Generals Pinochet of Chile and Galtieri of Argentina, the coronavirus pandemic has served to accelerate existing widespread social injustices across the continent and has led to a decidedly more leftist political tilt.
Recent examples of political upheaval started, in earnest, in 2019. Violent protests in Chile regarding increased corruption and the rising cost of living quickly spread to Colombia. While the pandemic stemmed the spread of the uproar, it has if anything galvanised those already feeling vulnerable and disenfranchised even more.
As Chile’s establishment yielded to popular pressure by agreeing to a new constitution, the election in May 2021 revealed just how much the country had moved to the left. Against expectations, the ruling right-of-centre coalition failed to reach a blocking majority, while hard-left parties garnered more support than the centre left.
Around the same time, a tax-reform proposal triggered violent protests in Colombia, leaving many dead and causing President Iván Duque to withdraw his controversial plan. The dimming chances of fiscal consolidation led to a junk rating being served by credit ratings agency S&P, with Fitch expected to follow suit. With the right-of-centre president now a lame duck, we believe there is a real chance that Colombia could turn sharply left at the next election in mid-2022.
Peru is already decidedly leftist. A country with enviable fundamentals and China-like growth rates, it has recently voted in a hard-left president who has vowed to overhaul the economic model. But while the party run by Pedro Castillo is left-wing Marxist, he has drawn up more neutral policies since winning the election, including central-bank independence and not nationalising the mining sector. While we are wary of Castillo and will continue to monitor his policies and cabinet appointments closely, our view is that he may not be as negative for the country as the media are making out.
In Brazil, the former leftist president Lula da Silva is staging a comeback and is likely to run in the October 2022 elections. While he is no wild-eyed radical, he would do away with Brazil’s spending caps, the country’s only remaining fiscal anchor – a move likely to unnerve investors.
The big outlier in the region is Mexico, a country which has not only avoided social unrest but one whose president enjoys sky-high approval ratings. López Obrador is hard to place on the political spectrum, combining fiscal austerity with state intervention, particularly in the energy sector. But his incorruptibility and anti-elitist rhetoric make him popular with the masses and show that heightened concern for the poor across Latin America is not categorically a bad thing.
We believe these political winds of change require a nimble and selective approach to investing in the region. Asset values have been enticing across Latin America and, based on relative yields and equity valuations, we had been looking to increase exposure within the Asset Allocation team across bonds and equities.
Now it seems political uncertainty has raised the bar for us to do so, and we believe it is important to monitor the situation closely. Actively differentiating between country risks will, in our view, be the best way to help bolster performance.