Why Argentina’s New Leader Is Good for Latin America and Global Investors
-- Published: Tuesday, 1 December 2015 | Print | Disqus
By Frank Holmes
It might be hard to believe now, but Argentina once ranked among the top 10 wealthiest nations in the world, following the United Kingdom, United States and Australia.
Today, however, it’s one of the most corrupt, according to Transparency International, a group that annually measures public sector corruption around the world. In 2014, Argentina ranked 107, sandwiched between Niger and Djibouti.
That’s largely because for more than half a century, Argentina has been led almost exclusively by the far-left Justicialist Party, based on the political thought of Juan Perón—an admirer of Mussolini—and his wife Evita.
But this week, Argentina said “no, gracias” to further leftist rule when it elected conservative businessman and two-term Buenos Aires mayor Mauricio Macri to succeed Cristina Fernández de Kirchner as president. It was an upset victory for the people of Argentina, who have seen their once-prosperous nation deteriorate under decades of Marxist policies.
It was also a strong win for investors around the globe. Not since Narendra Modi’s election last year has a leader’s entry on the world stage inspired such bullishness.
In the three months leading up to the November 22 election, Argentina’s Merval Index rose 30 percent as optimistic investors anticipated a win by Macri.
Last week I was in San Francisco speaking at the Silver Summit & Resource Expo, where many fund managers commented that their Argentine holdings had seen huge jumps recently. Many people I spoke with there were bullish on the country.
Latin America Veering Right to Escape Corruption
I join many others in expressing my belief that this change in leadership points to an ideological shift in Latin America and a rejection of the Peronism that has threatened to turn the region into an also-ran economy. I’m confident that once Argentina demonstrates to its neighbors that market-friendly policies stir economic growth and help lead to widespread prosperity, the people of Colombia, Brazil, Venezuela and others will demand similar corruption-free leadership.
In Venezuela—which is slightly less corrupt than the likes of Yemen, Libya and Iraq, according to Transparency International—the people are still reeling from Hugo Chávez’s disastrous administration. With food shortages and hunger worsening, the government implemented fingerprint scanners in grocery stores last year to limit purchases of basic goods.
This, despite Chávez—a leader who was supposed to be “for the people”—being worth an estimated $2 billion at the time of his death two years ago. It’s believed that he stole much of his wealth from the country’s oil industry. Today, his daughter Maria Gabriela is the wealthiest woman in Venezuela, worth double that.
In August, global intelligence company Stratfor conducted an analysis of satellite imagery taken of Puerto Cabello, Venezuela’s main port of entry for imports, between February 2012 and June 2015. The visible reduction in food container traffic is alarming.
Meanwhile, in Peru, First Lady Nadine Heredia is being investigated for money laundering and the usurpation of public functions. When I was in country earlier this month speaking at the Mining & Investment Latin America Summit, there was a lot of discussion on rule of law and corruption in Peru and surrounding South American countries. It’s estimated that stolen public money in Peru adds up to about 2 percent of GDP annually.
Latin Americans are increasingly saying enough is enough.
“What happened in Argentina was the first change in Latin America,” said former Brazil finance minister Maílson da Nóbrega, speaking to the Wall Street Journal. “It may be the start of a downfall in populist governments. I think the next one should be Venezuela. And I think Brazil will follow suit in 2018.”
Brazil President Dilma Rousseff, who won reelection last year, currently has an approval rating in the single digits. As I shared with you last month, her Marxist policies have suffocated business development. The country tumbled 18 points this year in the annual Global Competitiveness Index (GCI) and is now considered to be one of the worst in terms of burdensome government regulations and unethical business practices. The people of Brazil deserve better.
This is part of the reason why I believe active management is so important. When I travel around the world and talk to different people, I obtain and return with tacit knowledge that can’t be found by simply reading Bloomberg.
Macri Bucks the Trend
In this troubling context, Mauricio Macri is a breath of fresh air. He’s not what most people envision when they’re asked to describe the stereotypical South American leader. Unlike Fidel Castro, Chávez, Rousseff and others, Macri never served as a Marxist guerilla in his youth. There are no pictures of him posing heroically in a steaming jungle, attired in military garb like fellow Argentine Che Guevara. Macri’s more likely to be found playing a friendly game of soccer than delivering a rousing hours-long speech from a balcony. By most accounts, he’s contemplative and soft-spoken.
But change is precisely what Argentina needs now. For the last 12 years, former President Néstor Kirchner and, following his death, wife Cristina managed only to cripple the country’s economy even further. The size of the state doubled in the last 10 years alone. Entire industries were nationalized, taxing and spending skyrocketed, foreign investment fled and inflation exploded at an average pace of 20 percent a year.
Realistic or not, Macri has vowed to roll back many policies from previous administrations. He also plans to cultivate a warmer business climate with Brazil, Argentina’s top trading partner, and staunch the outflow of foreign capital. Last year, $2 billion left the country, a 75 percent increase from 2013, according to the Organization for Economic Cooperation and Development (OECD).
Which is a shame. Argentina has a huge amount of untapped potential—a highly educated population, the fastest-growing middle class in Latin America and an abundance of natural resources.
Here’s hoping Macri’s administration can succeed at fostering a more welcome environment for business, one that might benefit the Argentine people and global investors alike.
From Pump to Plate: Low Fuel Costs Help Americans Spend Less on Thanksgiving Dinner
As Argentina is facing steep inflation, American consumers today are spending a little less on essentials such as food—more specifically, Thanksgiving dinner.
According to the Texas Farm Bureau’s Thanksgiving Meal Report, a typical spread of turkey, stuffing, sweet potatoes, cranberry sauce and more cost $46.48 this year, down 31 cents from 2014.
(The one Thanksgiving staple we spent more on this year was pecans. They’re up 11 percent as China’s appetite for the nut has increased.)
The reason for the savings? Lower fuel and grain prices. As a whole, grains are down about 11.5 percent from a year ago, while crude oil is off more than 36 percent. According to AAA’s Fuel Gauge Report, gas averages $2.05 per gallon right now, a 27 percent decline from this time last year.
As I’ve been saying since last December, this “oil peace dividend” is helping us save not only at the gas pump but also the grocery store and elsewhere.
Additionally, AAA estimates that 46.9 million Americans travelled 50 or more miles this Thanksgiving holiday, the highest travel volume since 2007. Because of lower fuel costs, more Americans evidently felt as if they could afford to travel longer distances to visit Grandma and Grandpa. A spokesman for AAA says that motorists are currently saving about $11 on every full tank of gas compared to this time last year.
What Is Janet Yellen Thinking?
Speaking of saving, Americans are saving at the highest levels since 2012. At the same time, personal spending is slowing GDP growth.
That’s according to a new report by investment advisor Strategic International Securities (SIS), which writes that it believes a rate hike next month is unlikely.
“The Federal Reserve needs to keep real interest rates at zero to set the equilibrium between the demand and supply for money in the economy,” SIS strategist Philip L. Miller says. “This further implies in order to keep investment where it is already making up for nearly 30 percent in the trend GDP shortfall, the Fed believes it needs to keep real rates at zero to sustain the current anemic levels of private investment or they may falter even more.”
In addition, BCA Research reports that the Fed is no closer to achieving its key 2 percent inflation goal than it was at the beginning of the year. Inflation expectations, in fact, are shifting down. The Fed’s preferred measure of inflation, core PCE, has remained stuck at 1.3 percent all year.
We won’t know what Yellen’s thinking until December 15, but whether or not she decides to raise rates, it might be a good time to consider tax-free, short-term municipal bonds. Shorter-term, quality munis are less sensitive to rate increase than longer-term bonds that are locked into rates for greater periods of time.
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