Several themes, including trade rhetoric between Mexico and the US and the strong run of Brazilian equities, have dominated Latin America’s capital markets this year.
Axel Christensen, BlackRock’s chief investment strategist for Latin America and Iberia, shared his views on those issues and their impact on BlackRock’s investment strategy, in an interview with LatinFinance. The following is an edited transcript of the conversation.
LatinFinance: We’ve seen a lot of political noise from the administration of US President Donald Trump. What’s your view on where things stand? And has it forced a change in your investment strategy?
Axel Christensen, BlackRock: We’ve seen some change in the tone [by the Trump administration] from a more confrontational to a more “let’s try to find a win-win NAFTA 2.0”. That has changed the perception of financial assets in Mexico. We’ve seen, for instance, the Mexican peso go back to the level it was around the election. The Mexican equity market has been hitting historic highs. So some investors have reassessed their views.
I would not go as far as to say investors are completely relaxed in terms of where the negotiations might go. Other financial assets, like fixed income, have not gained back some of the losses. My interpretation is that fixed-income investors are starting to look not only at the risk associated with the change in the US-Mexico bilateral relationship, but also at what the internal political situation in Mexico might look like.
Recent polls around the Mexican presidential election next year reveal some concern about a change in focus in economic policy. It’s early yet, but there is some concern showing up in some financial assets in Mexico.
LF: BlackRock has been very active in Brazilian equities. Do you still see room for a continued rally? Or is the market getting too expensive?
AC: Overall valuations are of concern to the extent that these recovery processes are never smooth. They have ups and downs. The process of moving ahead with the reform agenda will also meet some difficulties now and then, as we’re currently seeing with pension reform.
Our concern is to the extent that the market reflects a price to perfection in terms of both economic recovery and advancing on the reform agenda. Yet my colleagues at BlackRock who invest in Brazil from a bottom-up perspective, who are looking at specific stocks, say that they are still finding interesting opportunities.
LF: We’re seeing a lot of debt issuance from Argentina. Are you worried about the amount of dollar debt issuances? Is investor appetite still robust?
AC: What we’re seeing is Argentina’s gradual comeback to the external debt markets, first by the central government and now by the provinces. Some corporate issuers have come to market as well. I would say they’re coming back in a size that is consistent with the Argentine economy. On the corporate issuance, some companies had been postponing investments until there was a more stable macroeconomic situation, and that seems to be starting to happen.
A big chunk of issuances is expected from a country that has been pretty much separated from international financing. I also think there is an interesting element on the demand for Argentine debt. The government’s tax amnesty process is aimed at having Argentines become significant investors in Argentine debt and in other instruments.
I think we’re seeing a combination of the return of an important issuer in the context of emerging market debt, combined with some specific conditions related to the tax repatriation incentive.
Is it a source of concern? Argentina’s fiscal situation is still in the process of being resolved. Argentina is still carrying fiscal deficits that have to be funded by issuing debt. I think investors acknowledge the significant efforts from the current government to reduce that deficit. That eventually means less funding will be required, but it’s a process, and not an easy one.
LF: What’s your contrarian call for 2017?
AC: The possibility of a better-than-expected outcome in the free-trade negotiations between the US and Mexico. NAFTA has been in place for a long time. Both the Mexican and US economies have developed substantially since it was first agreed upon.
Most trade agreements tended to only focus on the trade of goods. Services between the US and Mexico have been increasing in importance. So to the extent that a new treaty might include services and also include issues that are important to the US, such as better protection for intellectual property, could be a positive. To the extent that negotiation is done in an environment where they’re looking to strike the best deal for both parties, I think it might actually turn out to be a good thing. LF