Brian Jacobsen

Understanding South American Economies (excerpt)

On the Trading DeskSM4-10-13
By Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

William R. Cline, Ph.D., senior fellow at the Peterson Institute for International Economics, discusses drivers of South American economics with Brian J. Jacobsen, Ph.D., CFA, CFP® in this excerpt of On the Trading DeskSM from Friday, April 5, 2013.

Listen to the full interview.

Can you give us a primer as to what have been historically and what may be the engines of economic growth throughout South America?
The big picture for Brazil, Chile, Colombia, and Peru is that they have greatly strengthened their economies since the lost decade of the 1980s and the debt crisis. The engines of their growth in recent years have been commodities, the very rapid growth of the market in China. But a crucial element is they’ve adjusted their fiscal policies. They’ve sharply reduced their foreign debt, which used to be something like 400% of exports of goods and services, now down to about 100%. Their inflation 3% to 5% annual rate, whereas in the 1990s, Brazil’s inflation reached triple digits. Their average growth has been on the order of 4%, and that’s solid but it’s not overwhelming for emerging markets. They did pretty well in the Great Recession. They didn’t have as huge a decline as for the United States and Europe. 

I think Brazil warrants special attention. It’s the region’s largest economy. It had high growth in this decade based on strong commodity prices, large inflows of capital. It has large offshore oil resources for future development. But last year, its growth fell very sharply, from almost 8% the year before to only about 1%, and its inflation went up to 6%. So it’s in an awkward moment of what you might call stagflation. It’s also taken a whole series of interventionist measures. Thirty percent tax on the auto imports, requirements of high local content for the ships, and the equipment to develop the offshore oil. A whole set of tax cuts for a special list of industries, pressure on the banks to increase the volume of their lending, pressure on Petrobras and minerals exporters to keep prices down. And this atmosphere of an intervention has increased uncertainty, and Brazil has a not too good history of protection, so the auto tariffs give one pause. Even so, I think it is a good bet that Brazil will have strong growth over the longer term, and forecasters are putting its growth at about 3% this year.

To what extent would you say that that Populism might spread to other countries? Like, for example, Brazil.
I would be surprised if the Chavez/Argentina axis gained further power. I would expect that to moderate. I don’t see Brazil being infected by Chavezmo. I mean, we’ve got to remember that Brazil has plenty of homegrown Populism. You know, over the years, the Brazilians have done all kinds of things, as I say, you know, government intervention with protection of imports to have import substitution industrialization. Interestingly enough, Brazil has done an excellent job of dealing with the poor in recent years. The incidence of poverty, a $2/day benchmark was 30% back in 1990. Now it’s down to about 10%. But they’ve done it in a sustainable way. So I think that the Brazilians will basically not go off on a Chavez-type tangent, but they are sort of more in the center between the sort of strictly market groups, I mean Peru, for example, and the axis of Argentina and Venezuela.

Dr. Cline, I’d love to get a parting thought from you perhaps for our investors.
I guess what’s not clear to me is how, as solid the outlook for these large Latin American economies are, basically excluding Argentina and Venezuela at the moment, that translates into opportunities for the average investor, in part because of this government intervention. You know, if Petrobras gets a relaxation of its price controls, then the stock goes up. But if the government decides it needs to control prices to control inflation, the stock goes down. There’s also the complication of volatility and the exchange rates. The exchange rate tends to be pushed up when international markets are in the so-called risk-on phase, and they tend to be pushed down when they’re in the risk-off phase. The region’s growth also depends, importantly, I think, on China’s continued rapid growth because commodity exports are so important. And South America’s still quite dependent on the European market, so the fact that Europe seems to be in stagnation for some considerable time gives one pause.

Dr. Cline, it’s been an honor having you on the show. Thank you.
My pleasure. Thank you.

Program note: Please join us Friday, April 12, 2013, to discover investment opportunities in South America in a video edition of On the Trading Desk featuring Derrick Irwin, portfolio manager on Wells Capital Management’s Emerging Markets Equity team.

The views expressed are as of 4-10-13 and are those of Chief Portfolio Strategist Brian Jacobsen; William R. Cline, Ph.D.; and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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