Month: October 2020

Latin America has been hit  hard by the pandemic.  The region’s economic and social concerns have worsened.

Both cases and mortality rates are some of the highest in the world, and probably under-reported relative to many countries (eg Mexico).

The region was the epicenter of the pandemic from late spring through the summer (the winter region in the southern cone).

The IMF forecasts that the region will be hit harder and recover more slowly than other regions, especially Asia. This comes in the wake of a decade of economic underperformance.

The fiscal response has varied tremendously, as elsewhere in the world, depending on ideology and politics, not so much fiscal space. Brazil and Argentina, the two most fiscally constrained countries, have spent the most. Mexico, which has most fiscal space, has spent the least.

Fiscal generosity in Brazil created a financial windfall for low-income families which resulted in a financial and consumption boomlet.

In Brazil the fiscal response has caused a deterioration of public finances which is likely to have  negative consequences for growth prospects.

Brazil’s debt levels are very high given its history and volatile economy.

The pandemic is increasing inequality and social division. ECLAC estimates a 45 million increase in poverty (30% to 37.5%) and 30 mm increase in extreme poverty (11% to 15.5%).

Poor, women and children most impacted.  The poor cannot social distance or work at home . Poor children do not have access to online schooling.

All is well in the “elite bubble,” and the “Gig Economy” is booming.

The poor and the rich used to watch the telenovelas together. Now the rich are on Netflix, HBO and Youtube.

The region’s problems predate the pandemic. The region has been characterized by low and volatile growth, deteriorating fundamentals, and premature deindustrialization.

Latin America is the poster child of the “Middle-Income Trap”

Investment is too low to promote growth.

The region suffers from acute premature deindustrialization.

Well-paid unionized manufacturing jobs are disappearing, replaced by the “gig economy.”  Brazil is Uber’s largest market measured by rides. There are  3.8 million delivery workers.

Latin America has had a lost decade. Before the pandemic it was crippled by Dutch Disease (The Natural Resource Curse), which is caused by boom-to-bust commodity cycles and entails vicious asset, debt and currency cycles and tends to result in the weakening of institutions and the worsening of long-term growth. This was the situation before the pandemic.

Asset Bubbles

Increased Corruption and Crime

Deterioration of Business Environment (regulation, laws, etc…)

Not one Latin American country ranks well. Chile has fallen from the elite to second class.

EM Asian countries are all improving, including India. Vietnam is the new Asian Tiger.

A terrible decade for the stock market.

The region suffered a huge hangover from the commodity boom bubble combined with the onslaught of slowing global growth and technological disruption. Emerging markets are a value trade and value has been out of favor because of low growth and worsening fundamentals.

Earnings and valuation started high and have drifted down.

The region has severely underperformed both EM and Asia.

Latin America has become irrelevant as an asset class. It peaked at nearly half the index during the 1990s. It is now 7% and declining.

The region’s sectorial composition looks like a flashback to the 1990s.

 

Tech disruption is the main driver of market performance.

But Latin America trades like a copper stock.

Tech is small but it outperforming.