Brazil will take centre stage in June when the FIFA World Cup kicks off. Stadium construction delays and concerns that the country’s poor infrastructure will be unable to cope have led to accusations that the country is ill-prepared for such a big event. Later in the year there will be elections. Dilma Rousseff is predicted to hold on to the Presidency, but an embarrassing World Cup or a renewal of the social unrest that marred last year’s Confederations Cup could quickly change her fortunes.
In general, the business community would welcome political change, but fear of defeat could prompt the current government to resort to populist policies that lead to a further deterioration in the fiscal deficit. One crumb of comfort is that persistently high inflation has put the central bank ahead of the curve in raising interest rates compared to other countries with vulnerable currencies. Hence, although this will ensure economic growth remains muted in 2014, Brazil is further through the adjustment process than most.
In Mexico, last year was characterised by positive reform headlines but disappointing economic activity, resulting in Mexico’s economic growth being below that of Brazil. This makes 2014 critical for two reasons. First, in the face of higher taxes, Mexico has to deliver on expectations for a rebound in growth, through an increase in government spending and aided by continued recovery in the US. Second, the hard work of ironing out the finer details of the reforms, in particular the energy reform, needs to be completed. Success on both these fronts will give investors confidence in a structural improvement in Mexico’s long-term growth rate.
Elsewhere in the region, the peripheral countries of Venezuela and Argentina have created headlines for the wrong reasons already this year, both having effectively devalued their currencies. This has added to the nervousness surrounding exchange rates in Latin America that began last summer with talk of the US Federal Reserve tapering its quantitative easing programme. Although this is painful in the short term, it is happening because growth in the US is on a firmer footing, which will lead to stronger demand for the region’s exports.
Valuations in Latin American equities are approaching very attractive levels: like a Mexican piñata, the more hits they take, the closer we get to a gift in the form of a compelling buying opportunity being opened up.
Nicholas Cowley, Investment Manager, Global Emerging Markets at Henderson Global Investors