Why is Brazil doing so well in the current geopolitical climate?

Since 1980, the Brazilian economy has consistently underperformed compared to other LatAm markets, but the end of July may be showing promise of returning to the glory days. With workers often striking and a questionably inefficient public sector – Brazil often struggles to keep afloat financially. It seems that 2018 has been the year of buoyancy for the brasileros. In the rubble of the current trade conflict – Brazil may re-establish itself as the captain of Latin American markets.

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Since Trump declared a trade war with China, Brazil has found itself in a strong position. Seeking alternatives, the Chinese have begun trading with Brazil to fill the gap left by sanctioned American supplies, which have been taxed by up to 25%. Should they continue to build this trade relationship, Latin American emerging markets could profit significantly – with Brazil at the spearhead.

Brazilian stocks have been rallying as their domestic political environment improves and they take the mantle as a primary beneficiary for the U.S.A.’s trade war with China. The Bovespa Index has since jumped 12% during the past month while the iShares MSCI Brazil Index ETF has also risen by 12%.

As exportation makes up a mere 13% of the Brazilian GDP, they are relatively unaffected by external events. However, they still remain the largest exporter of food, soft commodities, and minerals – coincidentally, the same exports that China previously bought from America. These two aspects should be seen as the reason China would turn to Brazil – a somewhat stoic economy with expertise in exports that the Chinese have been deprived of. Because of this, should the Chinese decide to continue trading with Latin America, the Brazilian GDP will most likely prosper.

Peter Donisanu, an investment strategy analyst at Wells Fargo Institution, has claimed that there is an improvement in risk sentiment across emerging markets and Brazil is piggybacking off of that. He continues arguing that recent easing of trade tensions between the U.S. and some of its key partners has improved sentiments around emerging markets, and consequently, Brazil.

While there has been an improvement in risk sentiment, as Donisanu claims, LatAms sudden boost seems to be directly correlated to recent political events, and it would be a large coincidence to say otherwise. While Brazil most definitely is piggy backing off attitudes towards emerging markets, their disproportionate boom should be attributed to the Chinese interest – not a general interest.

Italy’s Harlequin Performance

The laughable situation in Italy in which the traditional political parties struggle for majority votes at the behest of the populist movement “5 Star” (MS5) is somewhat remnant of the Renaissance theatre style commedia dell’arte. MS5, the ambiguous and enigmatic harlequin-esque populist movement, has danced its way into mainstream politics taking a large slice of votes from the Right-Wing parties, who are now screaming “encore” as they attempt to scramble enough power to encourage a second election. But why have these events had a tumultuous effect on the rest of the world?

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The political drama began when the MS5 seized power through their refusal to bow down to political elites. This is not the typical Left vs. Right epidemic we see in most Western countries, but more of a working class vs. elite struggle like the Catalonians against Franco or British Labour reforms in the 60s. At this stage, MS5’s aim seems drastic – this is not just about a reform, this is about a revolution with a focus on domestic empowerment, immigration issues and the European Union alongside a strong hatred of the mafia. But nothing is set in stone, and due to this, Italy are currently proving real tricksters to label which is a massive turn-off for international investors.

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Geo-political issues and rapid social change tend to not bolster share prices, and since the beginning of this new chapter, Italy’s stocks have gone on sale. Rocky prices like we have seen it Italy do however tend to draw in the braver investors who hedge their bets on the dangerous side. Unfortunately, the sale prices don’t match the level of volatility in political stability, and therefore don’t seem to be a great bargain. This of course puts off even the high-risk investors. JP Morgan strategist Mislav Matejka noted recently that there is a poor risk-reward going forward giving the strong run and the political overhang.” It seems that nearby German equities have been the preferred route for most investors after taking profits on Italian stocks.

This mass sell-off of Italian stocks was originally triggered by fears of a second election and investors fear of Italy ditching the Euro, which currently seems highly likely. Investors have decided to keep their money in their pockets for now until the situation cools down with SocGen trio warning that buying could remain weak for several months.

Italy’s performance hasn’t just affected Europe, it managed to dance its way across to the Atlantic and cause the Dow Jones Industrial Average to drop 391 points. Although the Dow Jones made a huge recovery, making back most of the May dip, it is still undeniable that Italy’s Euroscepticism and quick social change managed to scare even the Americans.

No one can predict the ending of this drama, and although for now it seems that Italy have put forward a government, we don’t know if we are at the beginning or end of this unbridled saga which will likely continue to tighten the strings on investors’ wallets.

 

Oil Prices – Who Wins and Who Loses?

Due to Trump’s recently announced Iran trade sanctions and OPEC led geopolitical shifts, oil prices have soared to a three and a half year high since March 2018. Saudi Arabia are set to benefit greatly from this if they look to use the opportunity to diversify their economy, but consumers will be left footing the bill all around the world as companies pass on their new oil expenses.

Donald Trump is reinstating sanctions on Iran, one of the world’s major oil suppliers, claiming the deal was a “horrible agreement” and “an embarrassment” during his speech on Tuesday, May 8th. In restricting trade with Iran, he inadvertently increases the price of oil by reducing supply to the market. This has happened at a point in which crude oil prices were already estimated to breach the $80 mark due to other geopolitical factors.

Aside from Trump’s involvement, OPEC has rallied its efforts to reduce exports, curtailing the quantity supply to the demand, therefore erasing a global surplus. Consequentially, we could soon see a global shortage of crude oils – theoretically increasing the value of crude oil for years to come. Other factors include a 0.6 million barrel per day reduction in supply from Venezuela due to domestic issues, aging wells naturally depleting all over the world, and exhausted supplies from China and Angola.

Saudi Arabia, who can use the money from oil to diversify its economy from this single commodity propping up its market, are set to benefit from this opportunity greatly. These circumstances fuel its long-term “2030 vision” which seeks to lessen domestic reliance on oil. Unsurprisingly, this OPEC member has led the way in curbing supplies by 0.7 million barrels a day since 2016.

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Although OPEC countries will thrive in this economy, airlines may experience some turbulence as they pass on surmounting costs to the consumer. They will inevitably have to dump the pain of expensive fuel unevenly to jetsetters meaning flights prices might increase above inflation. Airline analyst Savanthi Syth claims this will mainly affect leisure travel lines – whose consumers are highly price sensitive – and are more loyal to price than to brand. This is opposed to business travel airlines, who will not suffer much grief in passing the costs along.

Despite this, budget airlines could use these incidents to push their brand as being the cheapest – taking a short term hit to profit and hoping for long term loyalty after the oil hype dies down – if it ever does.

 

Is It Finally Euro-Russian Economic Armageddon?

Russia’s economy is heavily reliant on the European Union (EU). Over the last six years, we have seen a decline in trade relationships between the neighbours with EU investment falling by heights of as much as 44pc in 2014. Could the recent alleged Russian chemical attack in Salisbury, Britain hammer the final nail in to the coffin of an already dying economic relationship?

The EU/Russia trade relationship is based on the price of oil. Here’s why: The EU market’s relationship with Russia is dependent on the growth of the Russian economy, but this growth is intrinsically linked to oil prices. If this commodity does badly, then Russia does badly. Since 2011, and most significantly 2012-2016, the price of oil began to a steady decline – which is correlated to the weakened financial partnership between the EU and Russia. This was seen most notably at the end of 2015, when hydrocarbon exports were down 42pc from 2012. This subsequently leaves Russia in a weakened financial position – they could not burden further blows and remain buoyant in their current economic situation.

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But the Salisbury attack could be the last straw. Western states have already begun an exodus of Russian politicians from their embassies which worsens Russia’s geo-political influence worldwide.  So far, this has had no impact on the EU/Russia trade deal. Yet, if these sanctions begin to affect trade relations, Russia’s economy could find itself on life support as it stumbles toward a nadir. Its economy is already being pressurised by the decline in oil price, and a dwindling relationship with the EU – trade sanctions would leave the Russian economy in a hopeless situation, seeking alternative solutions.

It seems Russia is  aware of this and have begun reaching out to alternative markets to keep their economy afloat. In difficult circumstances Russia has reached out to Turkey, a nation who has been trying to gain access to the EU for years but has been rejected for a myriad of reasons – most notably their poor human rights record. Earlier this month, Putin joined President Erdogan at a ceremony for a Russian made Nuclear Power Plant. This isn’t the first sign of a romance brewing between the two nation states. Over Christmas they finalized an agreement that Turkey would purchase their S-400 Missile Defence System. Aside from this, they are building the Turkstream pipeline to transfer Russian gas to Turkey. Will Russia need the EU if relationships blossom with alternative markets? They have reached out to Turkey, but could this become a patterned behaviour?

DISCLAIMER: This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities. Past investment performance may not be indicative of future investment performance. 

Financial Ramifications of the UK Response to Russia’s Chemical Attack

From the outside, the purported Russian chemical attack in Salisbury, England is reminiscent of your favourite spy novel – one by John Le Carré, perhaps. The story might go a bit like this: a former Russian intelligence officer living in exile, enjoying lunch with his daughter at a popular local Italian restaurant, only to be found left for dead on a nearby park bench alongside a range of questions like How? Why? And Who? Unfortunately, this compelling drama isn’t a novel but real life, and as British-Russian relations tumble to a post-Cold War low as a result, how will this ordeal impact these two great nations’ economies?

By of the end of March 2018, over 200 diplomats have already been expelled from over 20 countries in Europe, Australasia, and North America in solidarity with the UK against Russia’s alleged aggression. NATO has further removed 7 diplomats from their alliance.  Since the attack, Russia has haemorrhaged political influence as countries turn their back on them to condemn their aggressive behaviour. The question on everyone’s mind is, could this soon escalate and become a financial Cold War?

The London property market and UK banks have long been known to shelter the money of Russian oligarchs. British Prime Minister Theresa May and her government are in the process of deciding whether they should clamp down on these assets and impose a ban on the City of London from helping Russia sell its sovereign debt, a process which props up their economy. It would certainly send a strong message to Moscow that Britain is still a strong international actor – even during the instability she faces during Brexit negotiations.

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Were the British Prime Minister to take this drastic action it is reasonable to expect that Vladimir Putin’s Russia would respond in equally robust terms. In our hyper-globalized world, it should come as no surprise that Russia has influence over socio-political conditions in Britain. The UK’s National Grid has been using Russian natural gas reserves to help keep up with demand for years; in 2015 nearly 10% of the UK’s consumption came from Russia. Although the winter is nearly over, and natural resources may not be important during the summer months, winter always returns, and there is the risk that next year Britain may struggle turning on the central heating.

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The question remains: are economic sanctions and restrictions worth bearing the socio-political ramifications of a stand-off? That remains to be decided. For now, the world waits to see both May and Putin’s next moves.

DISCLAIMER: This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities. Past investment performance may not be indicative of future investment performance.