Argentina’s New Currency Crisis: What Happened This Time?

The peso crisis in Argentina: A risk analysis. What happened this time? Is any comparison with the previous crisis (1998 – 2002) possible? What impact could we expect in the close-term for President Mauricio Macri and the country’s political stability? The article tries to give some clues on what might be going to happen in the South-American State.

A history of debt crises

Argentina is no stranger to currency and debt crises. In the 20th century, periods of economic growth often led to trade deficits, pressure on the currency and the hasty adoption of fiscal austerity to tamp down the economy, creating an impoverishing and tiresome cycle of boom and bust. After a bout of hyperinflation in the 1980s, Argentina attempted to stabilize the Argentine peso by tying it 1:1 to the dollar in 1991 (the Convertibility Plan). Though successful in the short term, convertibility went disastrously awry at the century’s turn.

Argentina’s contemporary problems are a typical currency crisis. Those who hold Argentine pesos or peso-denominated assets are selling, partly to buy US dollars and dollar-denominated assets because the US Federal Reserve is raising interest rates. Argentina also runs a fiscal deficit, which it has to finance in dollars or another hard currency. As the peso falls, that debt becomes harder to service, increasing fears of default and creating a cycle of ever-increasing pressure on the peso. As the peso falls, prices rise – inflation currently runs at about 30 percent per annum.

The Argentine central bank attempted to stem the pressure on the peso by raising interest rates to extraordinarily high levels – they reached 27.25 percent at the end of April, and 40 percent in the first week of May. However, the peso continued its decline. The International Monetary Fund (IMF) was created just for situations like this. The Argentine government in May appealed to the fund for credit to reassure investors, obtaining a credit line of $50 billion, which the state can use to ensure its debts are paid and to support the peso. In return, the Fund has mandated Argentina take steps to reduce its budget deficit through fiscal austerity, including cuts and the reintroduction of taxes on exports. Argentina announced it would speed up this fiscal tightening on September 3.

Argentinian politics: A turn to the right

During the first decade of the 21st century, Latin America was seen as undergoing a left-wing transformation, with governments of varying left-wing ideologies, identities and programs coming to power in the majority of the region’s states. Since 2015, by contrast, there has been a turn to the right.

Argentina’s initial drift to the left began after the convertibility crisis of 1998-2002, which saw extreme austerity, an explosion in poverty and unemployment and the total discrediting of the IMF and economic orthodoxy more generally. The left turn in Argentina was represented by Néstor Kirchner (1950-2010), president between 2003 and 2007, and Cristina Fernández de Kirchner, his wife and successor as president between December 2007 and December 2015. The Kirchners introduced subsidies for utilities and public services, wage increases and, under Fernández de Kirchner, the nationalization of private pension funds to support public spending. Fernández de Kirchner also introduced capital controls, limiting the ability of peso-holders to exchange or sell their pesos on the open market, and thus the peso’s depreciation.

The Kirchners kept the peso reasonably stable, but prosperity during their tenure depended in large part on high prices for Argentine commodities (most notably soybeans). They also presided over a prolonged period of high inflation and considerable levels of corruption. In the 2015 elections, when Fernández de Kirchner could not run again, her left-Peronist faction ran Daniel Scioli, who in turn lost narrowly to Mauricio Macri, the mayor of Buenos Aires and representative of a center-right coalition, Cambiemos.

Macri succeeded in reducing subsidies and returning Argentine bonds to global markets – the country had been unable to borrow openly after the 2001 default. He also deregulated the finance sector. However, his attempts to cut inflation failed, while Macri failed to attract foreign investment. The currency crisis makes it harder for him to argue that his orthodox, conservative economic policies will succeed in restoring Argentine prosperity.

Economic risks

The immediate worry would be that Argentina would again default on its obligations. How likely is that? Well, the fact that the IMF credit line hasn’t prevented increasingly extreme attempts to reassure markets is certainly a bad sign. The Argentine central bank raised interest rates to a dizzying 60 percent at the end of August. There are significant doubts that Argentina will be able to meet the inflation and budgetary targets the IMF demands in return for its help.

The IMF learned during the 2001 crisis that it does not pay to continue supporting a country that is obviously going to become insolvent, so it is certainly possible that the IMF will cut off support – perhaps up to a 50 percent chance over the next year. This means that the danger of an Argentine default in the next year is probably almost as high, as it’s unclear who else might fund Argentina’s deficits.

Political risks

The immediate concern would be the sort of political chaos that attended the 2001 default. This led to a popular uprising and the flight of President Fernando de la Rúa from the Casa Rosada. The chances of this happening over the remainder of Macri’s current term (i.e. between now and December 2019) are probably very low – under 10 percent. The main reason is that the trigger for de la Rua’s downfall was neither inflation nor a default, but his order to freeze bank accounts (which prevented people from withdrawing their pesos and buying dollars). Macri is unlikely to issue a similar order simply to avoid recalling that precedent; rather, like Fernández de Kirchner, he would probably try to limit access to dollars in other ways.

The second political risk, especially from the purview of foreign investors, is Macri’s losing the next presidential elections, due at the end of 2019. This depends on a number of factors. Will Macri continue to pursue austerity and risk a recession, or limit cuts in a bid to save voters some pain?  Will Cristina Fernández de Kirchner be able to run, or will she be barred, legally or practically, by corruption investigations?

Because many Latin American countries do not allow presidents to run for immediate consecutive terms, there are relatively few precedents to apply. Macri is not accused of epic-scale corruption; indeed, his government has been rather vigorous in pursuing graft cases. His economic record is poor, but Fernández de Kirchner’s was not emphatically better. Given that Macri won his first term by a margin of three percent and his poor economic record, the chance of a left-wing victory would probably fall between 40 and 55 percent.

How Will Dollar Appreciation Against the Real Impact Brazil’s Economic Recovery?

Internal political uncertainty and US rising interest rates have caused a two and a half year high of the dollar to real exchange rate. The dollar’s appreciation, in turn, has caused concern regarding Brazil’s economic recovery – which has been driven by its internal market – given its pressure on inflation and the possible decrease in consumption as products become more expensive.

On September 5, the dollar hit a two and a half year high against the real closing at R$ 4,14 – the highest level since January 2016. Throughout the past few months, the dollar continued to rise and exchange offices were selling the tourism dollar – dollars sold directly to consumers – at R$ 4,32. Since January 2018 the dollar has appreciated 25% against the real.

International and domestic factors

On the international front, the dollar’s appreciation was caused by higher yields on U.S. Treasury securities which rose to 2% and continuous fear of a trade war between the US and its trade partners. Additionally, the Federal Reserve may continue its interest rate increase to contain inflationary pressures due to economic growth – especially in US retail sales. The concern is that an increase in retail sales may increase inflation, and in order to contain this increase, the Federal Reserve would likely increase interest rates even further.

High interest rates in the US – deemed the safest market in the world – have the potential to attract resources from other emerging market countries, such as Brazil.

In Brazil, the appreciation of the dollar can also be explained by the continuous volatility in the presidential polls. Last week, the Superior Electoral Court (TSE) voted to deny Lula da Silva from running under the Clean Slate Law – as of the latest August poll Lula was polling first with 39%. After the TSE decision, a new poll was published on September 5 without Lula; Jair Bolsonaro is now first with 22%, followed by Marina Silva 12%, Ciro Gomes 12%, Alckmin 9%, and Haddad 6%. Doubt remains as to whether the next government will make the necessary economic reforms to reach fiscal balance.

Alongside the dollar pressure, the Brazilian economy continues to underperform with 1.1% growth so far in 2018. This indicator is far worse than what was expected, causing economists at financial institutions to revise the GDP growth to 1.44% for 2018 – earlier in the year the expectation was 2.70%.

Brazilian Central Bank

So far in order to intervene, the Central Bank has held a number of foreign exchange swaps, equivalent to the future sale of dollars. In its latest round, on August 30, the total offer was $1,5 billion.

On August 1, the Central Bank’s Monetary Policy Committee (Copom) decided to keep interest rates at 6.5%, signalling caution due to the volatility of the external scenario.

The Selic rate is used to keep inflation within its target to control prices of goods and services – when inflation is low the Central Bank lowers the Selic rate to boost economic activity, and when inflation is high they increase the Selic to encourage people to consume less to remove reais from the market (sometimes increasing unemployment). Financial analysts project inflation at 4.16% for 2018.

Despite this volatile scenario, Minister of Finance, Eduardo Guardia, and Central Bank President, Ilan Goldfajn believe that Brazil will not face the same difficulties as its neighbour, Argentina, since Brazil has low levels of foreign debt, high international reserves, opportunities to sell future dollar contracts, and stable foreign investment inflows.


The dollar’s appreciation has a direct impact on the pockets of Brazilians. Uncertainty in the presidential elections polls and a need for security has caused investors and Brazilian tourists to buy more dollars, which in turn increases the price of the dollar even more.

In addition, it causes an increase in prices of goods and service and puts pressure on inflation, as many parts of the final goods are imported using U.S. currency – especially true for the electronics industry as well as food such as bread and pasta since wheat tracks the price of the dollar. In addition, the price of oil is likely to continue to increase due to tensions between Iran and the United States. If the dollar rises too much too quickly, it creates concern of boosting inflation in Brazil – something that if relatively moderate would not be considered too negative given its low 2017 and 2018 rates.

Inflation may also be passed along to products that do not use imported parts as some goods are traded in dollars for export and Brazilian exporters will have to adjust their prices in order to make a profit.

In regards to tourism, the appreciation of the dollar comes with positive and negative effects. On the negative side, vacations for Brazilians looking to go abroad became extremely expensive. On the positive side, international travellers may be attracted to come to Brazil due to its weak real which in turn can boost the tourism industry activity and improve some parts of the economy.

Overall, an increase in the price of the dollar is set to delay economic recovery in Brazil, especially as safe countries like the United States become more attractive to investors.


Lorena Valente is an Associate at Promontory Financial Group, an IBM company.

Why Peru’s Democracy is at Stake in Vizcarra’s Anti-Corruption Crusade

As yet another corruption scandal reverberates through Peru, polling shows that citizens are disappointed with their government and doubting democracy itself. If new president Martín Vizcarra fails to lead Peru past the wrongdoing that has plagued its government for decades, Peru could fall into a democratic crisis.

On Saturday, Peruvian president Martín Vizcarra called for a national referendum on judicial and political reforms aimed at tackling the country’s widespread corruption. The week previous, he asked congress to debate the ouster of the country’s magistrates “in light of the evident acts of corruption and crimes”. These extraordinary moves come after recordings were released that chronicle widespread influence peddling between dozens of senior judicial officials and organized crime gangs. The judicial branch is only the latest Peruvian democratic institution to face a corruption crisis, after President Vizcarra himself assumed the presidency after the resignation of his predecessor due to corruption allegations. In fact, all six living Peruvian presidents have either been imprisoned, implicated, or investigated for corruption.

Governmental wrongdoing has undermined Peruvian belief in democracy

Polling shows that Peruvians are weary of these scandals, and that they have negatively affected their opinion of democracy itself. Surveys conducted in May, before the most recent round of corruption scandals, indicate that 62% of Peruvians are worried about financial and political corruption in their country, compared to 35% worldwide. This is enough to make Peruvians the most concerned among the 28 major countries surveyed. Confidence in democracy has followed a similarly troubling trend, with only 45% of Peruvians indicating that they support it, the lowest approval level in a decade. Upcoming polls will likely find that the situation has worsened, as anti-corruption protest marches have begun and there are movements to fly the Peruvian flag at half-mast during its Independence Day celebrations.

Vizcarra’s anti-corruption crusade

When he assumed office in March, president Vizcarra pledged to curb corruption “at all costs”. While this commitment may cause déjà vu among corruption-weary Peruvians, Vizcarra is one of very few Peruvian leaders that has any chance of bringing it to fruition. Most political decision makers that have the ability to reform the system have themselves been embroiled in corruption scandals. Key stakeholders in the public and private sectors have benefitted greatly from the status quo, and thus have little incentive to right the ship. Though Vizcarra faces substantial headwinds in his quest to clean Peru’s political system, there are three key indicators to watch that would suggest his attempts will be successful:

Firstly, if he pays close attention to the governmental structures that will enable his success. A clean, independent judiciary is a vital pillar of any successful anti-corruption campaign, so he should continue to enact drastic actions to clean out any wrongdoers.Firing wrongdoers and leading thorough reviews is a good start, but he should also be sure to identify and place an untainted crop of new magistrates lest a new judiciary display the same problems as the old.

Secondly, if he heavily leverages the Peruvian people’s dissatisfaction with corruption. It is clear that many politicians have an incentive to inhibit the success of his initiative, so Vizcarra must mobilize the citizens that they supposedly represent and pressure the politicians to either clean up their act or resign. Though Vizcarra’s approval rating has fallen precipitously to 37 percent from his initial figure of 57 percent, he still is far more popular than any other Peruvian politician. By calling a referendum, he has taken am first step toward uniting the Peruvian people behind him.

Thirdly, if he creates a functional relationship with the powerful politician Keiko Fujimori. While Vizcarra’s lack of political history and party affiliation makes him feasible as an anti-corruption crusader, it puts him in a weak position compared to Fujimori, who helms Fuerza Popular and controls a healthy congressional majority. Since the Peruvian constitution grants disproportionate power to the unicameral legislature, any major proposition by the Vizcarra government will require the de facto sanction of Fujimori. Fujimori herself is under investigation for corruption and money laundering and wasmentioned as a potential co-conspirator in the same recordings that revealed wrongdoing in the judiciary, so conflict between her and Vizcarra’s anti-corruption crusade may be inevitable. Nonetheless, if he is to expect any major success in his administration’s objectives he must find a way to at least maintain a temporary alliance.

Outlook: what if he fails?

Vizcarra is faced with the unenviable task of confronting corruption and reinvigorating the legitimacy of his government in the eyes of the Peruvian people. He will likely find that much of the Peruvian government is hostile to his cause. Since he is one of a very small group of Peruvian politicians that has a realistic chance of reforming the system, his failure could prove the final straw for citizens. Peru’s democracy is already lacking strong institutions and leadership, and the further exasperation and disenfranchisement of its citizenry would make it susceptible to power grabs. The end result of Vizcarra’s failure could be a state where establishment and anti-establishment strongmen compete for power.


Arthur Williams is a Consultant in the Kuala Lumpur office of Kaiser Associates, a management consulting firm.

After An ‘Easy’ YTD 2017, How Will Monetary Policy Impact Bonds Latin American Countries?


Inflation has been benign in Brazil. In its latest reading for September, it rose 2.5% from a year ago, which is below the central bank’s target of 4.5% plus or minus 1.5%. There are wide-ranging expectations regarding the Selic to be reduced to 7% by the end of this year.

In all likelihood, these expectations will materialize. However, the central bank has already expressed that future rate cuts could be gradual.

Given that the reduction of the Selic to 7% is largely expected, it is already priced into its bonds. At this juncture, aggressive rate cuts in 2018 are not expected and investors in the country’s bonds would need to focus on developments on the political front to drive bond yields once the rate cut cycle draws to a close.


Monetary policy easing in Peru this year has been aimed at spurring economic growth. The country’s economy had grown at a less-than-expected 2.4% pace in Q2 2017 after posting a 2.1% rate in the first quarter.

Inflation has stood at 3.04% in May, higher than the 1-3% range that the Banco Central de Reserve del Peru targets, but the reserve rate was still slashed for the first time this year. Though this seems counterintuitive, it was needed to support the economy and was made possible by views that the factors putting upward pressure on inflation were transitory.

Another indicator which helped the central bank reduce rates was the strength of the Peruvian sol against the US dollar. A stronger domestic currency increases the returns on local currency-denominated bonds when converted to dollars.

Similar to Brazil, the Peruvian central bank may be close to ending the rate reduction cycle. However, it can still consider cutting rates once either this year or the beginning of the next year depending on how inflation moves in response to the most recent rate cut. Inflation slowed to 2.94% in September, and if the impact of the intermittent rise in food prices is only transitory, one more rate cut may be in the offing.

Chile and Colombia

Unlike Brazil and Peru, monetary policy easing may have come to a close for now for both Chile and Colombia.

Chile’s Monetary Policy Rate was last slashed in May, and even though inflation remains benign at 1.5% in September, lower than its 3% target, moderation in the central bank’s stance indicates that until essential, further rate reductions may not be considered.

In its May policy statement, the Banco Central de Chile sounded neutral on further rate cuts by pledging to remain flexible about monetary policy. This was a major change from consideration of additional easing in the April statement, and easing being necessary given market conditions in the March statement.

However, the central bank has headroom to reduce rates further if conditions warrant in 2018.

As far as Colombia is concerned, the Banco Central de la Republica de Colombia may like to see the effect of the rate cut at the end of August on the economy. A bounce back in economic growth may reduce the necessity to ease policy rates further.

What Are The Biggest Blockchain And Digital Currency Initiatives In Latin America Right Now?

Latin America: less faith in local currencies

Only 51% of the Latin American (ILF) economy has access to banking services, with political and currency fluctuations repeatedly undermining trust in local currencies. Moreover, increased compliance requirements and costs have caused many traditional financial institutions to exit the market. This phenomenon offers a growth opportunity to automated compliance, blockchain technology innovations, digital currency platforms and cross-border payments systems that help avoid transaction costs.

Blockchain innovation initiatives being taken in Latin America

  • Brazil’s central bank is seeking to investigate possible use cases for blockchain technology and is now moving toward prototyping.
  • Brazilian (EWZ) (CSBR) banks have already trodden the path. Banco Itaú and Banco Bradesco are a part of the R3 consortium. Banco Bradesco is launching pilot projects such as a new digital wallet using blockchain technology in partnership with eWally and Bit.One, to address cross-border payments.
  • Chile’s (ECH) Santiago Exchange and IBM (IBM) have partnered to implement blockchain technology into the country’s financial services sector.
  • Mexico (EWW) based start-up, Bitso secured $2.5 million in funding in early 2017.
  • Mexican venture capital fund, INGIA, invested in Abra, the US blockchain mobile payments startup.
  • In Argentina (ARGT), startups such as Rootcamp provides smart contract solutions for bitcoin technology, while SatoshiTango and Xapo provide bitcoin-based payments solutions.
  • Argentina-based Ripio wants to transform banking on the blockchain with the Ethereum blockchain’s ERC 20 protocol credit network using smart contracts for borrowers, lenders and underwriters.
  • Uruguay is currently experimenting with its own blockchain-based digital currency, according to a statement made by the Banco Central del Uruguay’s (BDC) chief, Mario Bergara.
  • Cryptobuyer, a leading cryptocurrency (ARKW) (ARKK), and digital assets company in the Latin America is the first company ever to install Bitcoin ATMs (BTMs) in a commercial bank (Banistmo Bank’s headquarters).

4 Mexico Stocks Hit Hardest By Souring NAFTA Negotiations

Peso plunges on NAFTA Negotiations

Mexico continues to struggle under US President Donald Trump’s uncertain protectionist policies. The Trump administration is contemplating big changes to the North American Free Trade Agreement (NAFTA) that could have a serious impact Mexico’s economy.

Concerns over the ongoing fourth round of NAFTA negotiations have hit the Mexican peso, driving it to five-month lows last week. In the last six months, the Peso has plunged nearly 6%, making it the worst performing emerging market currency in the period.

Bank of America Merrill Lynch strategists expressed pessimism over the Mexican peso, expecting it to decline further, “We do not expect the NAFTA renegotiations to be smooth. We expect investment to decrease while volatility could pick up,” they wrote in a report. “The high level of rates will start to play against economic growth. Positioning remains heavy in Mexico.”

Impact on ETFs and indices

Mexican stock markets have also struggled through the year as Mexican companies feel the heat over a decline in exports. The iShares MSCI Mexico ETF (EWW) is down 6.8% over the last one month, while the benchmark IPC Index has lost 2% in value.

Moody’s forecasts Mexico’s GDP could decline by 4% if the NAFTA pact is terminated. Even though this decline is lower than the 6.5% decline in GDP during the 2009 financial crisis, it would lead to a “severe confidence shock” for the broader economy.

Barclays expects the cost of manufacturing would rise by 10-12% in Mexico due to added tariffs if NAFTA is revoked.

Mexico’s exports to the United States make up nearly 25% of its GDP, resulting in considerable risks for export-oriented enterprises in the event that NAFTA uprooted. Mexico is the third largest trading partner for the United States, just behind China and Canada. In 2016, US imported goods worth $294 billion.

Vehicles make up nearly 24% of total exports from Mexico, while electrical equipment, machinery including computers, and mineral fuels make up 20%, 16.5% and 4.8% of exports respectively. These sectors will be hit hardest in case tariffs are imposed on imports from Mexico.

Stocks hit worst and why

Large export-oriented corporations are most at risk to the potential implementation of trade barriers by the United States. This includes large companies like Alfa Sab Mexico, Gentera SAB, Empresas ICA and Mexichem SAB.

Amidst ongoing NAFTA negotiations, in the last one-month, shares of these companies have tanked 25%, 18%, 17% and 16% respectively.

1.    Alfa S.A.B. de C.V

Alfa Group is a Mexican conglomerate with diversified businesses ranging from petrochemicals, auto components, FMCG, oil & natural gas and IT/telecom services. The company is the world’s largest producer of engine blocks and cylinder heads for automakers.

Alfa operates in 21 countries across the world. The company operates under five major business heads Alpek, the petrochemical company; Nemak, the aluminum auto components company; Sigma Alimentos, the refrigerated foods company; Alestra, the IT & telecom company; and Newpek, the oil and natural gas extraction company.

In 2016, Alfa group generated nearly 24% of its revenues from the United States, thereby putting it at significant risks to the withdrawal of the NAFTA pact.

Alfa Group is currently listed on the Mexican Stock Exchange and the Berlin Stock Exchange with tickers ALFAA.MX and G4L.BE. The company’s shares are also listed on US OTC Markets with ticker ALFFF. Furthermore, the company is a constituent of the Mexican benchmark index IPC and leading S&P and MSCI Indices tracking Latin American securities. In the last month, shares of the company have declined nearly 26% making it the worst performer among its peers. YTD in 2017, shares of Alfa Group lost 14% in value.

2.    Gentera SAB

Gentera SAB, earlier known as Compartamos SAB de CV, is a Mexico based financial institution engaged in the business of providing banking and credit services to low-income individuals and communal banks.

The company operates in Mexico, the United States, Guatemala and Peru, through its various subsidiaries: Compartamos Banco, a micro-financing bank; Yastas, a network of affiliated merchants that provide payments and financial transactions, Pagos Intermex the payment of family remittances company and Aterna, an intermediary between the distribution channels and the insurance industry.

Gentera is currently listed on the Mexican Stock Exchange with ticker GENTERA.MX and on US OTC Markets with ticker CMPRF. The company is also a constituent of the Mexican benchmark index IPC and leading S&P and MSCI Indices tracking Latin America securities. In last month, shares of the company have declined nearly 18%. YTD in 2017, shares of Gentera lost 17% in value.

3.    Empresas Ica

Empresas ICA is a holding company engaged in civil and industrial construction, real estate and home development, and operates infrastructure facilities, including airports, toll roads, and water treatment systems. The Company operates in five segments: civil construction, industrial construction, concessions, airports, and corporate and others.

Empresas has a significant presence in Mexico, Spain, United States as well as other Latin American countries.

In 2016, the company generated 15% of its revenues from the United States, its largest market outside of Mexico, thereby exposing it to risks in case of termination of the NAFTA agreement.

Empresas is currently listed on the Mexican Stock Exchange with ticker ICA.MX. The company is also a constituent of the Mexican benchmark index IPC and leading S&P and MSCI Indices tracking Latin America securities. In the last month, shares of the company have declined nearly 17%. YTD in 2017, shares of Empresas have lost 84% in value.

4.    Mexichem Sab

Mexican Sab is one of the largest chemical and petrochemical companies in Mexico. The company has a diversified product portfolio ranging from telecom, infrastructure, housing, drinking and water in countries like Mexico, the USA, Europe, Asia, Africa (South Africa), Middle East (Oman), and Latin America.

Mexichem operates under the following business heads: Vinyl, which is involved in the extraction of chlorine, caustic soda and chlorinated derivatives; Fluor, which is focused on the extraction of fluorite, as well as production of hydrofluoric acid and cooling gases; Fluent, which includes the manufacture of pipes and fittings made of PVC, polyethylene and polypropylene, as well as geo-synthetic tubes and connectors, and Energy, which comprises power cogeneration for internal and third-party consumption. The company operates through various subsidiaries across the globe.

In 2016, Mexichem generated nearly 16% of its revenues from the United States, thereby putting it at significant risk to a withdrawal of the NAFTA pact.

Mexichem has been listed on the Mexican Stock Exchange for the past 30 years with ticker MEXCHEM.MX. The company is also a constituent of the Mexican benchmark index IPC and leading S&P and MSCI Indices tracking Latin America securities. In the last month, shares of the company have declined nearly 16%. YTD in 2017, shares of Mexichem have appreciated 9.2%.

Analyst Outlook: The Four Largest Telecommunications Stocks in Latin America

Moody’s outlook for the Latin American telecom industry

Mexican and Brazilian players primarily dominate the telecommunications sector in Latin America. However, experts remain bullish on the sector throughout the continent as smaller countries in the region are relatively untapped and have significant room for growth in terms of mobile and Internet penetration. Moody’s has a stable outlook for the Latin American telecom sector in 2017 as the industry continues to struggle with sluggish growth and cuts in capital investments. Moody’s forecasts EBITDA margins for the industry to decline from 35.6% in 2015 to 33% in 2018.  Marcos Schmidt, Moody’s Vice President stated, “Larger companies such as America Movil  (A2 negative), Telefonica Brasil (Ba1 negative) and Oi (Caa1 negative) will all see EBITDA minus capital spending grow at rates below the sector average, amid difficult economic conditions in Brazil, Peru and Chile, plus stiffer competition in Mexico that will slow growth and shrink margins.”

Moody’s has a stable outlook for the Latin American telecom sector in 2017 despite the industry’s recent sluggish growth and cuts in capital investments. Moody’s forecasts EBITDA margins for the industry to decline from 35.6% in 2015 to 33% in 2018.  Marcos Schmidt, Moody’s Vice President stated, “Larger companies such as America Movil  (A2 negative), Telefonica Brasil (Ba1 negative) and Oi (Caa1 negative) will all see EBITDA minus capital spending grow at rates below the sector average, amid difficult economic conditions in Brazil, Peru and Chile, plus stiffer competition in Mexico that will slow growth and shrink margins.”

The agency also expects margins of telecom companies to decline due to cut-throat competition between operators. Mexico’s telecom space has become extremely competitive ever since new regulations were introduced in 2014. Dominant players in the country are compelled to cut prices, putting profit margins under pressure. Meanwhile, “In Brazil, companies such as Telefonica Brasil and Claro that focus on the postpaid market will be more resilient than Oi and TIM, which concentrate more on Brazil’s quickly shrinking prepaid market,” Schmidt says

The four largest telecom markets in Latin America are currently Brazil, Mexico, Argentina and Chile.


Brazil is the largest telecom market in Latin America and the fifth largest globally. The telecommunications sector contributed nearly 4% to Brazil’s GDP last year while users of mobile services grew from 41 million last year to 80.6 million in August 2017. Currently, mobile internet in the form of 3G and 4G is accessible to 98.4% of the country’s population according to Telebrasil, Brazilian Telecommunications Association.

The Brazilian telecom market is primarily dominated by four large players – Spain’s Telefónica, Mexico’s América Móvil (AMX),  and Oi, controlled by Brazilian investors and Portugal and GVT.

In the last twelve months, the telecom market in Brazil has grown by 5.9% and is dominated by America Movil, Telefonica and Oi. The market leader America Movil added nearly 200,000 connections in the past one year, occupying 31% market share, while Telefonica and Oi command 27% and 23% of the market.

Spain’s Telefonica operates in Brazil as Telefónica Brasil and has branded its landline and mobile offering under Vivo. Mexico based América Móvil group operates as mobile operator Claro and cable TV services provider Net Servicos. Oi offers landline and mobile services under the Oi brand name. GVT is the country’s most successful alternative network provider, offering landline services only.


Mexico is the second largest telecom market in Latin America with 89 million users, representing nearly 70% of the population. The telecom sector contributes nearly 3.5% to the country’s GDP.

The local market is owned by three major players. América Móvil’s Telcel has 67% of mobile connections, while Telefónica-owned Movistar has 24%, and AT&T, after acquiring Iusacell and Nextel in early 2015, occupies 9% of the market. Since 2010, mobile operator market shares have remained largely unchanged in the country.


Argentina is of the most developed broadband markets in South America, second only to Chile. The telecom market in Argentina is primarily dominated by Telecom Argentina, Movistar, Claro, and Telecom Personal.  The local fixed-line industry is dominated Telecom Argentina (Telecom) and Telefonica de Argentina (TA) while the broadband market is occupied by Telefonica de Argentina, Telecom Argentina, and Grupo Clarin.


Chile’s broadband penetration is relatively high compared with other Latin American countries. In the past decade, Chile has benefited from solid GDP growth as larger Latin American economies have faltered. Currently, the country has one of the highest GDP per capita income, leading to high disposable income for telecom services.

Telefónica’s Movistar, Almendral’s Entel, and América Móvil’s Claro are the largest players in Chile, operating through Nextel Chile and VTR.

Telecom stocks to consider

Year to date, the MSCI World Telecom Index has surged 0.5%. Comparatively, the MSCI Brazil Telecom Index, MSCI Mexico Telecom Index, MSCI Argentina Telecom Index and the MSCI Emerging Markets Telecom Index have returned 23.5%, 48.2%,71% and 15.1% respectively.

Looking at ETFs, the iShares Latin America 40 ETF (ILF) invests 4.9% of its portfolio in Latin American telecom stocks while the iShares Global Telecom ETF (IXP) provides 2% exposure to Latin America telecom stocks. YTD, shares of these ETFs have returned 25.6% and 3.7% respectively.

The largest Latin American telecom stocks by market capitalization are America Movil, Telefonica Brasil, Tim Participacoes Sa, Telecom Argentina and Nortel Inversora.

Year to date, shares of these companies have returned 27.5%, 11.6%, 45.72%, 84.58% and 56.7% respectively.

The largest Latin American telecom providers by revenue are America Movil , Telefonica Brasil , Oi SA, Tim Participacoes SA, and Telecom Argentina S.A. In 2016, these companies generated revenues of $52.3 billion, $12.3 billion, $7.5 billion, $4.5 billion and $3.6 billion respectively.

America Movil

America Movil (MV9.F)(AMOV)(AMXL.MX) is the fourth largest mobile network provider in the world and a Forbes Global 2000 company. Controlled by Mexican billionaire Carlos Slim, it provides 363.5 million access lines, including 280.6 million mobile subscribers worldwide.

In Mexico, its subsidiary Telcel is the largest mobile operator commanding a market share in excess of 70%. The company operates in Jamaica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Peru, Argentina, Uruguay, Chile, Paraguay, Puerto Rico, Colombia and Ecuador through its Claro subsidiary while in Brazil it operates through Embratel and Claro. In the United States, it operates through its subsidiary TracFone. It is among the largest telecom providers in the United States. The company also own 30% of KPN, the Netherlands based telecom company and 60% of Telekom Austria Group. In 2007, America Movil acquired Jamaican telecom company Oceanic Digital. América Móvil acquired 100% of Jamaican mobile operator Oceanic Digital, under the brand name MiPhone in August 2007. On November 15, 2005, the company signed an international pact with Bridge Alliance to jointly deliver various international services.

America Movil is the largest Mexican company by revenues with annual sales of $52.3 billion in 2016. In 2016, the company owned assets of $73 billion, making it the largest company in Mexico by assets.

The company trades on the Mexican, New York and Frankfurt stock exchanges (MV9.F)(AMOV)(AMXL.MX). With a market value of over $63 billion, the company is currently the most valuable company in Mexico, more than the next three most valuable companies combined.

Telefonica Brasil

Telefonica Brasil (VIV)(VIVT3S.SA) is the Brazilian subsidiary of the Spanish telecom giant Telefónica. The company entered Brazil in 1998 while privatization of state owned Brazilian telecom company Telebras was taking place. Telefónica began their operations in Brazil under the brand Vivo in 2003 through a joint venture with Portugal Telecom. In 2015, Telefónica Brasil acquired GVT to become the largest telecom operator in Brazil.

As at June 2017, Telefonica served nearly 97.6 million customers in Brazil. The company generated revenues of $12.3 billion in 2016, pitting it against the largest global telecom players.


Oi (OIBR4.SA)(OIBR-C) is Brazil’s leading telecommunications service provider, and is one of the largest telecom companies in South America in terms of subscribers and revenues. The company operates through its subsidiaries Telemar and Brasil Telecom.

In June 2016, the company filed for a $19 billion bankruptcy protection, the largest so far in Brazil. The in-court reorganization has been slowed by ongoing disputes between creditors and shareholders.

In 2016, the company serviced 63.6 million customers and generated $1.1 billion in revenues. The company trades on the Brazilian and New York stock exchanges and has gained 59% in 2017 so far.

Tim Participacoes SA

Tim Brasil is the Brazilian arm of Italy based telecom provider Telecom Italia Mobile (TI). The company has nearly 61.3 million customers in Brazil and is the first mobile company to service all states in the country.

In the last twelve months, TIM was the fastest growing broadband operator in the country growing its subscriber base by 21% to 378,446. TIM is the fifth largest broadband player in Brazil with a market share of 1%. In 2016, Tim generated revenues of $8.8 billion, third highest among Latin American telecom companies.

Shares of the company are listed on BM&F Bovespa (TIMP3.SA) and NYSE exchanges (TSU) and have gained 46% in 2017 so far.

Analysts opinion

Analysts are wary of telecom companies in Latin America’s largest economies – Brazil and Mexico – as they struggle with political and economic uncertainty.

Recently, BTIG initiated coverage on Latin America’s largest telecom company America Movil with a neutral rating raising doubts in its ability to manage its shareholder’s returns along with its massive debt burden. However, the research house is bullish on Telefonica Brasil.

Analyst Walter Piecyk mentioned in a note to investors, “The bankruptcy filing of Oi closes another chapter in the development of the wireless market in Brazil and could mark a turning point for the industry. Investors have shown little interest in the Brazilian wireless industry in recent years given the economic and political turmoil combined with the inability of the wireless industry to consolidate … Telefonica Brasil, which uses the Vivo brand in Brasil, remains the safest way to play Brasil telecoms given its diversified business, synergy opportunity and strong management team. Its stock has materially outperformed TIM Brasil, resulting in what now might be an unwarranted valuation premium …

America Movil’s total enterprise Value is slightly over 5x our 2017 EBITDA estimate in a year that we expect no growth. The stock price also implies a free cash flow yield of 7%, but primarily because of the more than 20% cut in capital investment expected this year, which we believe could have longer term negative implications for revenue growth potential. America Movil sometimes issues special dividends, but given the lack of free cash flow growth at the company and share repurchase we estimate a dividend yield of less than 3%this year and next,” the note continued.

Shares of America Movil have received 4 buy ratings, 2 sell ratings and 11 hold ratings. In comparison, Telefonica Brasil has received 13 buy ratings and merely 4 hold ratings. Telefonica Brasil has received no sell ratings. TIM has received 4 buy ratings, 2 sell ratings and 11 hold ratings. Analysts are most bearish on shares of Oi after the company filed for bankruptcy protection last year. The company has received 2 hold ratings and 3 sell ratings.

Valuations within the Latam telecom sector are stretched with average one-year forward PE ratio of 23x.

Nortel Inversora (NTL)(NORT6.BA), Cnt Telefonica Del Sur (TELSUR.CI) and Telecom Argentina (TEO) are the most attractively priced telecom stocks based on their cheap valuations. These stocks have one year forward PEs of 3.4x, 7.4x and 17x, and are trading at the steepest discount to their peers. Meanwhile Almendral Sa, Empresa Nacional De Telecom (ICA) and Atom Participacoes (ATOM3.SA) are expensive stocks.

Venezuela: ETF and ADR Playbook Should the Turmoil Subside

Venezuela continues to reel under a socio-economic crisis

Venezuela, one of the world’s largest oil producing countries, an OPEC member and Latin America’s largest crude oil company is on the verge of a major crisis. The current alarming situation in Venezuela enters a new phase as President Maduro plans to rewrite the constitution.

The deflationary situation that Venezuela faces began with the election of President Maduro in April, 2013. Venezuela had earlier attracted attention from foreign investors but since the socio-economic crisis began, investors have pulled out their investments from the country.

The average growth rate in Venezuela for the past five years is –4.24%. For 2017, the IMF forecasts Venezuela’s GDP to contract by –12%. It recently revised its forecast for 2017 from –7.4% to –12% as the country’s economic situation worsened. The extended economic recession currently prevailing in the country and along with the governance of President Maduro, has Venezuela in a critical position.

Venezuela has been highly dependant on petroleum as its main source of revenue for many decades now. The fall in crude oil prices since 2014 has caused subsidies to become unsustainable, and have led to the depletion of Venezuela’s foreign reserves.

Meanwhile, the Venezuelan benchmark index, IBVC index (IBVC) has surged 541% YTD (as of 24th August 2017). The index has reached an all-time high on 28 August 2017 following its lowest historical point in April 2013. $1000 of local currency purchased during the presidential election in 2013 is assumed to be worth $1.34 today.

The possibility of U.S. sanctions has caused Venezuelan bond prices to tumble sending shockwaves across the whole country. The latest economic and governmental changes have washed out the possibility of a stable political transition. However, optimism remains that the country will find its footing in the long-term. Investors of the same mind have a number of options to consider.

The largest 5 ADRs in Venezuela as of August 2017, trading on US OTC markets were as follows:

  • Mercantil Servicios FIN – ADR (MSFJY)
  • Fondo De Valores Immobiliarios (FNDOY)
  • Manufacturas de Papel-Manpa (MDPAY)
  • Siderurgica Venez SIV (SDNVY)
  • Ceramica Carabobo (CCOOY)

Currently, no funds provide exposure to Venezuelan equity markets. Investors seeking exposure to Venezuelan bond markets could instead consider the following ETFs.

In terms of exchange traded funds, the iShares Emerging Markets High Yield Bond ETF (EMHY) seeks to track the investment results of an Index composed of U.S. dollar denominated, emerging market high yield sovereign and corporate bond. The ETF has an exposure of 4.04% in Venezuela. YTD the ETF has a return of 7.93%.

Also, the VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM) invests in a basket of 350 dollar-denominated high-yield debt securities from corporates in emerging markets.  Bonds issued by the Turkish Bank, Yapi Ve Kredi Bankasi form 1.45% of its holdings and is the top holding of this ETF. Bonds issued by the Venezuelan oil company Petroleos de Venezuela SA (PDVSA) form 0.5% of its portfolio as compared to 3% previously. YTD the ETF has a return of 6.25%.

Lastly, the iShares JPMorgan USD Emerging Markets Bond exchange-traded fund (EMB) tracks an index composed of US dollar dominated sovereign debt issued by emerging market economies. This fund primarily invests in sovereign debt with Turkey, Russia, and the Philippines forming its top three holdings. Venezuelan bonds form 1.85% of this ETF’s portfolio. YTD the fund has returned 8.34%.

As The ‘Pink Tide’ In Latin America Retreats, How Far Will The Centrist Surge Reach?

Between 2000 and 2010, a slate of leftists swept into power across Latin America. This is widely known as the ‘Pink Tide’ of leftist presidents. Some of these included former guerilla fighters – Brazilian President Dilma Rouseff and Uruguayan President Jose Mujica – who were staunch supporters of leftist and, sometimes, Marxist ideologies. Recent history has seen the region slip from dictatorial militarism to right-of-center administrations and then the ‘Pink Tide’. Recently this trend has retreated as centrist governments take hold of the region and begin implementing more market-friendly policies; most notably in Argentina, Peru, and Brazil. However, it is still to be determined exactly what caused the Pink Tide to occur.

Latin American governments share a few structural similarities. Firstly, almost all are presidential systems with legislative assemblies elected through proportional representation. While the combination of these two systems has been praised in some circles, the poor economic performance and political instability that plagues much of Latin America make this an unattractive model. The complications of multi-partyism, executive-legislative interplay, and coalition-building all contribute to governmental gridlock. Joe Foweraker of Cambridge University notes that the best predictor of governability is a legislative assembly where the presidential party boasts 45% representation. Barring an out-and-out achievement of this threshold, a president’s best option to achieve high governability is coalition-building with their various political rivals. But fractious politics and large personalities limit the possibility for secure coalitions, which often-times leads to unstable government.

Historically, five types of interruptions have destabilized Latin American presidencies: resignation; resignation through early elections; presidential incapacity; impeachment; and coups. Government crises are a critical gauge of an electoral shift. If, during a crisis or interruption, the administration in power was a right-of-center party, there is greater likelihood of a leftist leader inheriting power soon after.

While this type of democratic interruption reduces stability, there is evidence that suggests this could positively impact Latin American democracy by reducing presidential rigidity. The increased flexibility stems from greater engagement between Latin American presidents and their legislative bodies; to which they have become significantly more beholden and responsible. As a result, presidents no longer have carte blanche to conduct their affairs free from legislative (read: public) scrutiny. This growing flexibility is creating a quasi-parliamentary state that couples some aspects of the rigid and centralized presidential system with the diffuse and flexible aspects of a parliamentary system. Though Latin America’s path-dependent adoption of presidentialism will likely never cede to parliamentary reform, this growing hybrid is providing a happy medium between the two systems.

Rather than a homogenous rise throughout the region, the left’s rise in Latin America occurred along a sweeping gamut, anchored on either end by the leftist rise in Chile and Venezuela. Chile’s leftward shift saw an embrace of neoliberal market forces and growing economic prosperity as a result of it. Venezuela, in contrast, adopted radical populism that railed against the international system – the United States, in particular – and did everything to reject that very same neoliberal market economy.

While most countries exist on the spectrum between these two extremes, they can generally be placed in one of these two camps. Colombia and Peru tend toward the Chilean camp, while Bolivia and Ecuador toward Venezuela. Argentina and Brazil, interestingly, vacillates between the two. Rentier economies are the best predictor of these affiliations. In non- rentier states the left are more likely to operate within the parameters of representative democracy and market economies.

Conversely, in rentier states, such as Venezuela and Bolivia, rents foster an animosity toward neoliberal policy constraints. The windfall of revenue from rents create illusory opportunity and the ability to reject the norms of the political and socioeconomic order. As evidence of this, Bolivia’s shift to left-radicalism from left-moderation followed the discovery of gargantuan natural gas reserves and a newly-formed rentier economy.

Commodity booms – such as those associated with mining, oil, and agricultural goods – allow for leftist leaders to garner widespread support through redistributive policies. Former Venezuelan President Hugo Chavez famously used the country’s substantial oil revenues to win the support of the country’s poor. Similarly, former Brazilian President Luis Inacio Lula da Silva famously instituted the Bolsa Familia welfare program which provided aid to poorer Brazilian families.

As the region grows economically, and a middle class begins to form, new concerns have come to the fore of political discussion that were previously less pressing, such as corruption and personal security. Where poverty was previously seen as a pandemic afflicting swathes of Latin American populations, now it is viewed as a social issue that must be tackled by the middle and upper class.

In her 2012 article, Karen Remmer explores the root causes of the rising leftist-populist governments in Latin America. While support has been growing for populism, strength has been drawn from both ends of the political spectrum. Though various factors have been blamed for this phenomenon, Remmer argues that it is due to

improving external economic conditions during the early 2000s, which relaxed the preexisting constraints on policy choice, enhanced the credibility of anti-status quo political actors, and created new opportunities for the pursuit of statist, nationalist, and redistributive political projects and associated challenges to U.S. hegemony

The rise of Latin America’s Left is not wholly dependent on current events, though. It is also related to historical factors that came to a head right at the onset of the ‘Pink Tide.’ More specifically, the region’s historical affinity for Marxist ideologies and how well they resonated with Latin American electorates. Voters and leaders who came of age during the height of Soviet-era Marxism inherited power at the time of the Pink Tide and ushered in a wave of leftist policies.

Starting with the post-colonial era, Latin American governments underwent a series of ideological shifts that saw the region skirt from left-wing and right-wing politics; with variations of each in between. The most critical period begins with the militaristic, dictatorial era of the mid-20th century. With Soviet-era Marxism sweeping through the world, its tenets found a particularly welcoming home in much of Latin America. Whether out-and-out Communists such as Cuba, or socialist heroes such as Chile’s Salvador Allende, Marxism was a viable and attractive option for many Latin Americans who saw themselves as part of an oppressed proletariat.

The ensuing military coups and dictatorships of the following decades were seen as rampant American interventionism – despite only a few documented cases of its execution. Nonetheless, this worked to build a deep anti-American sentiment across the region that manifested in violent protests and outright guerilla movements against central governments. Moreover, this was coupled with a rejection of American and neoliberal development policies such as the Washington-consensus which was expected to bring about accelerated growth to the region. The dictatorial era gave way to sweeping right-wing governments across the region that went about implementing the neoliberal policies so fervently rejected by previous generations of protestors. The late 1980s, through the 1990s, saw mediocre growth in the region as the global economy shifted away from much of the region’s largest commodities. This placed Latin American electorates in the domain of losses and left them ready to eject the current establishment in favor of leaders willing to make drastic changes.

The 2000’s saw the rise of the Pink Tide and the populist-leftist governments discussed today. Much of this was possible due to the rise of China on the world stage. China’s accession to the World Trade Organization saw its economy skyrocket from a middle-income country to the second largest economy in the world (by some accounts). The rise of China also saw a boom in commodity prices for the agriculture and mineral goods primarily exported by many Pink Tide countries. Countries such as Brazil, Argentina and Chile soon grew fat feeding the Chinese appetite for commodities. This put most of these countries in the domain of gains wherein electorates largely attributed the countries’ good fortunes to the administrations in power and rewarded them for their efforts. The improving external economic condition allowed for the positive impact that saw sustained growth in much of the region. More importantly, it allowed them to eschew ties with the United States and Western markets in favor of the newly-opened Chinese market which had an apparently insatiable appetite for Latin American goods. This rejection of the American market also saw a rejection of free-market policies in favor of leftist and redistributive policies. The pendulum, once again, swung back left.

The development of quasi-rentier states also saw a sharp divide amongst the Latin American left between what was seen as anti-American economies such as Brazil and Argentina, and pro-American economies which included Mexico, Chile and Colombia. This divide was most visibly seen in the two competing regional trade blocs: the Common Market of the South (Mercosur) and the Pacific Alliance. The Pacific Alliance, which comprises Mexico, Chile, Colombia, and Peru, embraced open market policies, free trade, closer economic integration, and discouraged trade with few, if any, states. Mercosur, comprising Brazil, Argentina, Uruguay, Paraguay, and Venezuela, is a customs union which, while touting economic integration, was protectionist in nature and paralyzed by political infighting. The close relationship between Mexico and the United States drew the Pacific Alliance closer to the US economy, while political animosity to the US from Mercosur members saw the bloc distance itself from the US in favor of China. Thus, Mercosur states benefitted from Chinese growth and were not as heavily impacted when the 2007 US Financial Crisis shuddered through the global economy. Conversely, Pacific Alliance members, namely Mexico, suffered greatly through the financial crisis. This juxtaposition lent leftist leaders legitimacy amid their electorate as they boasted continued growth throughout the storm.

The divisions witnessed along the Pacific Alliance-Mercosur divide similarly follow the ideological divides between moderate leftists and radical leftists. As outright agricultural and oil rentier states, Mercosur countries saw public rhetoric against the US escalate. Relations between Brazil and the US soured following a wire-tapping scandal, Evo Morales’ ejection of the United States Agency for International Development (USAID) as an American tool for manipulation, Hugo Chavez’ Castro-style bombast against the US ‘empire’ echoed across the globe, and Cristina Fernandez’ public feud with her country’s creditors and a US federal judge were all perfect examples of radicalized leftists as categorized by Kurt Weyland’s 2009 study on leftist governments. In contrast, The Pacific Alliance’s strong institutional framework and openness to market economies exemplify a more moderate leftist manifestation which was more centrist in nature. The sudden boom in commodity revenue for these radical leftist states saw a growing middle class – particularly in Brazil where record numbers of people were pulled out of extreme poverty. In this, the charismatic leader Luis Inacio Lula da Silva was revered. However, the growing middle class also brought about new issues not tied to economics – particularly, corruption and personal safety.

The new centrist surge that has been taking hold in the past few years is seeing the pendulum shift away from the left and back to the center. Starting with the election of Mauricio Macri in Argentina, there has been a signal that protectionist policies will no longer be tolerated if they are at the detriment of the country. The Kirchner governments were quick to give political handouts to their constituents and enact policies that were politically popular but economical anathema. Macri’s shock therapy was a clear and present move against that mentality. Bolivians’ refusal to give Morales a further term in office despite his unbridled popularity is another example that institutions are taking precedent to politics. Peruvians’ rejection of Keiko Fujimori this year suggests that her father’s legacy has tainted her as well, and they skipped over her to usher in former World Bank executive Pedro Pablo Kuczynski. Lastly, Brazil’s impeachment of Lula’s successor Dilma Rouseff on corruption charges indicates that the country has reached a new level of concern as outlined by Michael Shifter in his 2011 article “A Surge to the Center.” Even now, Rousseff’s replacement is dogged by allegations of bribery and corruption – indicating that this corruption purge is not limited to any one party.

Ultimately, the Pink Tide took place due to various of reasons. Increasing performance from budding Latin American rentier states were propelled by Chinese growth. As China expanded at an accelerated rate, they brought along anyone willing to hitch their caboose to their engine. However, following this path brought about unchecked government that flouted many of its laws and institutions while placating their electorate with politically popular policies. The booming economic conditions were vastly attributed to the skills of the leftist administrations rather than the external economic conditions that allowed for such rapid and unfettered growth. Coupled with the maturing generation of would-be revolutionaries – 4 Presidents of the Pink Tide were former guerillas – and the overall Marxist sentiments carried over from the Soviet era popular support for these leftist leaders welled across the region.

This constantly shifting allegiance to different political ideologies does not necessarily correlate with changing sentiments in the electorate. While most people identify as centrists, there is still a consistent shift along the left-right divide. There is a stark possibility that this has much to do with the institutional structure of Latin American presidentialism. Because of the region’s PR-presidentialism, there is a constant struggle between the executive and legislative branch. The increasing occurrence of presidential interruption suggests that, while the office of the president is still central to domestic power, the legislature is becoming increasingly combative with their presidents. The recent impeachments of Dilma Rouseff and Paraguayan President Fernando Lugo, and the ongoing battle against Venezuelan President Nicolas Maduro are only a few examples of this growing trend.


Yakir Pimentel is a contributor at Geopolitical Monitor.


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

The 5 Largest Emerging Markets Based FMCG Stocks And Their Battle Against Global Giants


FMCG Companies see growth opportunity in emerging markets

Emerging markets (EEM) are becoming the main drivers for growth of large FMCG companies. Companies like Colgate-Palmolive (CL), Unilever (UL) and Procter & Gamble (PG) have been increasingly allocating more resources towards expansion in emerging markets as growth slows down in developed markets.

Colgate Palmolive derives nearly 25% of its revenues from Latin America, while Asia Pacific accounts for 19% of its revenues. The company is reporting steady sales growth in emerging markets including Africa, Eurasia and Latin America, while sales in developed markets including Europe and North America have declined. In a recent note by Bernstein, a research firm, they highlighted the growing opportunity for Colgate Palmolive in emerging markets, especially China & India, the world’s most populated countries.

In an investors note, a Bernstein analyst stated, “This implies plenty of opportunity for companies like Colgate-Palmolive to continue to drive category growth in the form of volume if they can educate and instill improved oral hygiene habits in consumers, increasing brushing to two times or more per day.”

However, they also highlighted the growing threats from domestic players. “This makes us worried about the safety of Colgate-Palmolive’s organic topline annuity stream going forward, as homegrown players have differentiated themselves around historically and culturally significant offerings that are difficult for Colgate-Palmolive to replicate (at least at the same level of authenticity and without acquisitions),” the analyst mentioned.

Unilever generates 60% of its sales from emerging markets, much higher than its peers, and is heavily dependent on them for its growth. India and Brazil are Unilever’s second and third largest markets, contributing to 14% of the company’s revenues.

Procter & Gamble currently extracts only 35% of its revenues from emerging markets. The company generates 8% of its sales from Latin America, 9% from Asia Pacific (China accounts for 8%) and 8% from India, Middle East and African countries.

The key effects of exposure to emerging markets on margins of FMCG companies are determined by two major factors.

  • Uncertainty in emerging markets related to consumer inflation and adverse currency movements negatively affect the margins of these companies. While FMCG companies can benefit from high growth rates in emerging markets, hyperinflation is a risk to these companies resulting in high cost of production. Latin American countries including Argentina and Venezuela have inflation rates of 40% and 180%, respectively, and with these Latin American countries making up more than 20% of Unilever and Colgate-Palmolive’s sales, it is difficult to sustain profitability.
  • Competition from local homegrown players is perhaps the biggest growing risk for companies operating in emerging markets. In India, Patanjali is challenging the market share of Colgate-Palmolive, P&G and Unilever. In China and Brazil, domestic players are more nimble in differentiating themselves to adapt to local tastes and preferences, which becomes difficult for large multinationals to replicate.

5 of the largest emerging market based FMCG stocks

Multinational FMCG companies are facing major competition from local players in emerging markets. Since 2010, the MSCI Emerging Markets Consumer Staples Index has surged 59% while the MSCI Emerging Markets Consumer Discretionary Index has gained 65%. Comparatively, the MSCI Emerging Markets Index has seen gains of 6%.

Large FMCG companies including Colgate Palmolive, Unilever and Procter & Gamble are fixated on seizing opportunities for growth in emerging markets given high rates of economic expansion, rising consumption expenditure, and disposable income.

The 5 largest FMCG companies by sales in emerging markets are Hindustan Unilever (HINDUNILVR), Unilever Indonesia (UNVR), Hengan International Group (1044.HK), Natura Cosmeticos (NATU3) And Kimberly-Clark De Mexico (KMB).  Year to date, shares of these companies have returned 40.7%, 25.7%, 5.0%, 3.4% and 1.7% respectively.

Hindustan Unilever, India’s largest FMCG player, is the Indian arm of the British multinational company Unilever. In 2016, the company recorded sales of $4.8 billion, the highest among the FMCG companies operating in emerging markets. The company, better known as HUL has witnessed average sales growth of 2% in the past five years. YTD, shares of the company have gained 40%. In comparison, the Indian benchmark index- Nifty (NSE) has gained 20% while the MSCI Emerging Markets ETF (EEM) has returned 23.4%.

Unilever Indonesia is the Indonesian (EIDO) subsidiary of Unilever Ltd. In 2016, the company recorded sales of $3 billion. Between 2010 and 2016, Unilever has posted annual sales growth of 6%. Analysts expect a recovery in Indonesia’s domestic economy and estimate GDP growth of 5.2%. Further, government stimulus packages will boost consumer confidence that could benefit Unilever’s Indonesian operations. Publicly listed on the Jakarta Stock Exchange (JKSE), shares of the company have gained 24.2% YTD.

Hengan International Group (1044.HK) is the largest producer of personal hygiene products in China (FXI). The company, founded in 1985, has a market capitalization of $9.2 billion. Last year the company generated sales worth $2.9 billion. Shares of the company are listed on the Hong Kong Stock Exchange and have returned 5.5% YTD.

Natura Cosmeticos (NATU3) is the largest Brazilian (EWZ) cosmetics company by revenues. In 2016, the company recorded sales of $3.3 billion. Shares of the company were listed on the Sao Paulo Exchange in 2004 and have returned 3.4% YTD.

Kimberley Clark De Mexico (KMB) is the Mexican (EWW) arm of the US company Kimberley Clark. Last year, the company generated sales of $1.9 billion. Since 2010, Kimberley Clark’s sales in Mexico have decelerated at an average rate of 1.2% as the economy has been in crisis. Shares of the company however still have returned 2.6% YTD.


Sell side analysts remain bullish on FMCG stocks in emerging markets as they gain from high growth and rising consumption spending. Hindustan Unilever has received 24 buy ratings, 3 sell and 19 hold ratings, while Unilever Indonesia has 5 buy ratings and 3 sell and 18 hold ratings. Hengan International Group has received 10 buy ratings, 6 sell ratings and 11 hold ratings. Sell-side analysts are relatively bearish on Kimberley Clark De Mexico and Natura Cosmeticos as they have received 6 and 8 sell ratings each. Kimberley Clark De Mexico has received just 1 buy rating and 9 hold ratings while Natura Cosmeticos has 1 buy rating and 6 hold ratings.


Valuations within the FMCG sector in emerging markets are stretched with average one-year forward PE ratio of 46x.

Bombril (BMBPY), Imbalie Beauty (ILE) and Shineco (TYHT) are the most attractive stocks based on their inexpensive valuations. These stocks have one year forward PEs of 2.9x, 3.9x and 5.9x and are trading at the steepest discount to their peers. Meanwhile, Lykis (LYKISLTD), Lafine Chemical Industry and Lonkey Industrial (000523.SZ) are the most expensive FMCG stocks in emerging markets with PEs of 326x, 179x and 114.7x respectively.

H1 2017 Roundup: Who Was In the Driver’s Seat of the Emerging Markets Equities Surge, And Who Was Not?

The first half of 2017 is behind us and the strong equity market returns from emerging markets (EEM) have continued. The MSCI Emerging Markets Index has risen 17.2% in YTD 2017 until June. By Q1 2017 alone, the index had been up by 11.1%.

US investors have been big beneficiaries of the rise. According to Bloomberg data, exchange-traded funds listed in US exchanges and investing in emerging markets (VWO) have attracted net inflows amounting to $21.8 billion so far this year.

Stock markets from Asia have been primarily responsible for fueling gains from the Emerging Markets Index. This is so because countries from the continent dominate the Index as shown by the graph below (weighting as of May 31st) . Brazil is the only non-Asian country represented in the five largest nations comprising the Index with the top four Asian nations forming 64.3%.

Asia has led regional indices

Given the high allocation to Asian equities, the fortunes of the Emerging Markets Index are overly dependent on stocks from the continent. Superlative performance by the EM Asia Index has led it to be the best performing regional Index in H1 2017.

With returns of over 22%, the EM Asia Index has far outdone its peers in Europe and Latin America in the first half of this year. The EM Far East Index – which comprises of stocks from seven instead of eight Asian nations which form the EM Asia Index – has done slightly better than the latter. Indian equities are not part of the EM Far East Index.

MSCI country indices for China, South Korea, and Taiwan have each returned over 20% in H1 2017, while that for India has gained 19.6%. However, even then, individual indices for these countries trail those from Emerging Europe.

In the next article, let’s take a look at the countries from Asia which continue to power the Emerging Markets Index before focusing on emerging Europe which have also done exceptionally well but without the commensurate spotlight.

Watchlist: 10 of the Largest Supermarkets in Emerging Markets


Stocks to consider

Since 2016, the MSCI Emerging Markets Food and Staples Retail Index has returned 19% while the MSCI Emerging Markets Index gained 31%. In comparison, the MSCI Emerging Markets Consumer Staples Index has surged 16.2%.

Large global retailers including Tesco (TESO), Carrefour (CA), and Amazon (AMZN) see opportunity for growth in emerging markets given supermarkets contribute tess than 50% of total grocery sales in large emerging markets like Brazil (EWZ), China, Russia (ERUS) and India. Further, experts see long term growth potential for stocks in this space given the high level of fragmentation in these markets with top five players occupying less than 30% of market share.

Chris Palmer, director of global emerging markets at Henderson Investment Management believes investors have opportunity to pick up stocks with low valuations that have potential for long term capital appreciation as well and growth prospects. He is bullish on Russian supermarket chain Magnit (MGNT) that operates 14,059 stores in nearly 2495 locations across Russia. Shares of the company have lost 24% YTD.

The biggest supermarket operators in emerging markets by sales are Walmart Mexico, Almacenes Exito SA, Cencosud SA, CP All, Cia Brasileira De Dis, Shoprite Holdings Ltd, Organizacion Soriana and Yonghui Superstores.By market capitalization, the largest supermarkets are Sumber Alfaria, Almacenes Exito, E-Mart, Cencosud and Hero Supermarkets.

In 2016, Wal-Mart de Mexico, Mexico’s largest retailer recorded sales of $28.6 billion, the highest among the supermarkets operating in emerging markets. The company, better known as Walmex operates 2,411 stores in Central America and has witnessed average sales growth of 8% in the past five years.

Shares of the company have gained 18.5% YTD. In comparison, the Mexican benchmark Index- Indice de Precios y Cotizaciones has gained 18% while the MSCI Emerging Markets Index (EEM) has retuned 16.8%.

Almacenes Exito also known as Grupo Exito, is South America’s largest supermarket chain, operating 2,606 stores in the region. Almacenes primarily operates in Colombia under the brands Exito, Carulla, Vivero, Surtimax, Seper Inter and Surtimayorista Bodega through a number of subsidiaries. The company also manages supermarkets under Libertad and Mini Libertad brand names in Argentina. Additionally they also run Disco and Devotoy Geant brand names in Uruguay. In 2016, the company recorded sales of $16.9 billion. Publicly listed on the Colombian Stock Exchange, shares of the company have gained 4.2% over the year so far.

Cencosud is the largest retailer in Chile (ECH) and the third largest in Latin America with nearly 1,045 stores in the region. The company operates supermarkets, hypermarkets and department stores across the Latin American continent. In 2012, the company acquired Colombian hypermarket operations of Carrefour and changed its branding to Jumbo. Last year the company generated sales worth $15.3 billion but its shares have lost 4.5% YTD.

CP All operates 7-Eleven and cash and carry stores under the brand Makro in Thailand. Thailand has the third largest network of 7-Eleven stores after the US and Japan. In 2016, CP All operated 9,542 7-Eleven stores across Thailand (THD). In 2016, the company recorded sales of $12.3 billion. Shares of the company have retuned 2% YTD but have 14% upside in the next 12 months as per sell-side analysts.

Shoprite Holdings is Africa’s (EZA) largest retailer, operating 2,653 outlets across 15 countries in the continent. The company generated sales of $9.02 billion last year and its shares are up 17.3% YTD.

Yonghui, is the 4th largest hypermarket operator in China, and has significantly outperformed peers in the supermarkets space. The company is also on the list of Forbes Global 2000 companies across the world. The company has sustained substantial market share gains in recent years and has recorded average sales growth of 26% over the past five years. The company operates a total of nearly 450 stores across China as of Sep 2016. In 2016, the company generated sales of $7.4 billion and its shares are up 47% YTD.


Valuations within the supermarkets space have remained elevated, trading at 28.4 times its one year forward earnings. Comparatively, the MSCI Emerging Markets Index trades at a PE of 15.3x, while the MSCI Emerging Markets Food & Retail Index trades at 19.9 times its earnings.

Springland International, Cosco Capital, and Saudi Marketing are the most attractive stocks based on their cheap valuations. These stocks have one year forward PEs of 9.4x, 10.1x, and 12.9x and are trading at the steepest discount to their peers. Meanwhile, Sanjiang Shopping Club, Anhui Andeli Department and Avenue Supermarts are the most expensive supermarkets stocks in emerging markets with PEs of 110.2x, 67.6x and 61.4x respectively.