Investors applaud Political Changes in Brazil & Argentina: Which
Leaders are next?
by Ken Brown
In
a world of richly valued markets and paltry yields, one way to make money is to
bet on political drama.
The
market cheered the impeachment and likely departure of Brazil’s Dilma Rousseff
even before Sunday’s vote. The next day, investors were shoving each other
aside to grab a piece of Argentina’s first bond offering since its new
government took power.
Despite
deep economic troubles in both countries, investors are betting optimism over
new leaders and changing policies will drive up stock and bond markets.
“Investors
are looking for that rare story that has a catalyst on it,” said Samy B.
Muaddi, an emerging-markets-debt portfolio manager at T. Rowe Price.
This
bet has long been an obvious if not always profitable trade in emerging
markets. The last wave of change was in 2014, when Narendra Modi took power in
India and Joko Widodo became president of Indonesia. Shares rose roughly 20% in
India and Indonesia in the months leading to the election and held up later
that year even as other emerging markets tumbled.
Changes
in governments matter more today for two reasons: There are few attractive
investment options, and many markets are moving in sync, driven by factors like
commodity prices and U.S. interest rates.
A
rally this year has pushed up emerging markets 7.3% through Tuesday, compared
with a 2.8% rise in the S&P 500. That has forced investors to take on more
risk to stay in the game, which means looking for turnaround stories, even if
the turnarounds are largely uncertain.
The
fun part is picking the next to fall. Topping the list are South Africa’s Jacob
Zuma and Malaysia’s Najib Razak. Both leaders face corruption allegations and
are under pressure to resign, though both are political survivors with strong
party backing.
What
excites investors is that both countries have young populations that are
brimming with potential. What worries them is that both countries depend on
China buying their commodities and both face policy paralysis caused by
unpopular leaders and entrenched party establishments.
As
with all emerging markets, both countries are unloved by investors and cheap on
many measures. There are plenty of ways to make a buck in both
places—appreciating currencies, better corporate earnings and improved investor
sentiment.
The
risk with betting on change in emerging markets is that problems are so deep
and the global economic situation so weak that the optimism can dissipate
quickly. And there is the possibility that the bad government can still get
worse.
In
South Africa, Mr. Zuma backed off a plan to replace a respected finance
minister after markets sold off. In Malaysia, Mr. Najib appointed a political
ally who served on the advisory board of a scandal-plagued government
investment fund to replace the country’s widely respected central-bank head who
is retiring.
Then
there is undoing the mess left behind by the previous government. For many
emerging markets, that means somehow paying off big piles of debt that were
typically squandered on bad policies or used for political favors. Brazil’s
debt tripled to $1 trillion in the last nine years and all three major
credit-rating firms reduced the country’s rating to junk. The economy shrank
3.8% last year and will likely shrink again this year, making the debt even
more burdensome.
But
investors think back to 1992 and the last impeachment in Brazil, when then
President Fernando Collor was charged with corruption. His resignation
eventually ushered in the presidency of Fernando Enrique Cardoso, who oversaw
the country’s economic revival.
As
heartless as they can be, investors appear to be very forgiving these days.
Witness Argentina, which has been at war with hedge funds for 15 years and
whose central bank said earlier this year it would start printing
higher-denomination bank notes to deal with inflation that is estimated at
around 40%.
The
buying frenzy for Argentina’s offering—$70 billion in orders for $16.5 billion
in bonds—should be incentive enough for every country with a lousy government
to make a change. It is staggering that investors would lend money for 30 years
to a country that just emerged from a default in return for a yield of just 8%.
Buyers apparently bid up the bond prices further after the deal.
But
with emerging-market currencies up about 10% from their lows and bond yields
down to 4.6%, there aren’t many options to get a juicy return.
There’s
the frenzy and then the hangover. Two years after Messrs. Widodo and Modi took
over Indonesia and India, respectively, investors have started to lose patience
with the pace of change, even though both countries are doing reasonably well.
Fuente: THE WALL STREET JOURNAL
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