A global perspective on Latin America: BlackRock’s Axel Christensen
March 15, 2018 |
As political uncertainty grips the region, with upcoming elections in Colombia, Mexico and Brazil, BlackRock's chief investment strategist for Latin America argues for calm but says some markets still have a ways to go
As the global economic outlook improves and Latin American countries get on track for a modest recovery this year, market players are looking to large global investors like BlackRock for cues on how to assess local risks. Political volatility is likely to increase in Latin America this year as some of the region’s largest economies, including Brazil, Mexico and Colombia, elect new presidents. Voters will go to the polls in an environment of heightened anger over corruption and frustration with the ruling political class. The disillusionment has generated support for candidates with extreme views on the right and on the left, heightening the risk that efforts to maintain sound fiscal policies could be replaced by more populist programs. In the meantime, Argentina, a country with a solidly market-minded government, is looking more attractive to investors.
LatinFinance spoke to Axel Christensen, BlackRock’s chief investment strategist for Latin America and the Iberian Peninsula, at the World Economic Forum in São Paulo on March 14 and asked him about the investment manager’s expectations for the year ahead.
LatinFinance: What are your clients concerned about in 2018?
Axel Christensen: The first question has to do with our global perspective. They want to know how we see the global economy and the region within that scenario. They want to know how a global investor sees the region. They see Brazil a certain way, but they want to know how an investor with a global perspective like BlackRock see it. Global investors like BlackRock tend to be less extreme in their views.
When investors are pessimistic about Brazil, like, let’s say, in January 2016, just before [former President] Dilma [Rousseff] was impeached, the tendency is to see the worst. But global investors tend to provide more perspective. We tell them, “Yes, things are probably not that great, but compared to Venezuela, Brazil is in a good place.”
LF: Are your clients seeing a disconnect between the political risks associated with the elections this year in the region and the positive performance of financial markets, particularly in Brazil?
AC: Yes, they ask us about that. They ask how come the markets are rising in a year when there is an election and honestly nobody knows who will win. The [São Paulo stock exchange] Bovespa is at a record high and other assets are gaining. We are getting questions about the reasons behind that performance.
LF: It is getting better but it is still far from pre-crisis levels.
AC: Yes, it would be hard to see markets coming back this year. I would not see Brazil unemployment go back to the low levels we’ve seen because the structure of the economy just hasn’t recovered.
LF: What is BlackRock’s view on Argentina?
AC: Our CEO Larry Fink has spoken publicly about [Argentina], and we think it’s a great opportunity. It is still in recovery mode, and there are a lot of issues that have to be dealt with. President Mauricio Macri still has a minority in Congress, so he has to negotiate some of the economic issues that need to be dealt with, from very sticky inflation to the fiscal deficit, which is improving but is still a challenge. But Argentina is going in the right direction.
There are a lot of opportunities because there have been so many years of underinvestment, be it in infrastructure, or be it in real estate development. To be sure, there are a lot of gaps that still need to be filled.
LF: What is your view on the capital markets in Argentina?
AC: The capital markets are definitely an area where we see challenges in terms of further development, and at BlackRock we really get involved in trying to help authorities push ahead in terms of development. We’ve done it in Mexico and in Chile.
If investors want to fund projects in Argentina on a long-term basis, it’s very hard to find funding alternatives. There are inflation issues, and the local investor base is still very thin. Most countries have options. Mexico, Colombia, Peru, Chile and Brazil all have pension funds that allow investors to finance long-term projects. In Argentina, that is still missing.
In terms of financial services overall, Argentina, for years, has been closed to the development of financial services, very much in survival mode. Now it’s opening up. People want to save more locally. There is a demand for more sophisticated financial products. When people see the economy doing better, there is an incentive to start saving more.
LF: How sound is Argentina’s strategy to issue large amounts of debt considering its history and considering the current scenario? The honeymoon with Macri seems to be over, and now there are calls to investigate Finance Minister Luis Caputo over investment funds that he managed before he joined the cabinet.
AC: Yes, you are absolutely right. We are not underestimating the fact that there are a lot of missing parts in Argentina. In the financial markets, investors are pricing in those factors. If you look at their [credit default swap] levels, there is still a premium compared with other markets. Argentina is not a risk-free market, but it has already gone through a change in its economic team and it didn’t change that much.
On the strategy of going to the bond market aggressively, Argentina spent a long time away from debt markets because it had no access. In the private sector, companies were really in survival mode. They were not really thinking about building their business, but now there is an opportunity to do that, and they need resources to do it. The local market is not a place where they can find an abundance of resources. Financial leverage was very contained for many years, so there is space for that now. There is also a global opportunity now. Rates are fairly low today, but who knows for how long? There is also a sense that now is the moment. LF