Cobre, Por Favor (ECH,EWZ)
We’re turning our investment focus this week to a corner of the planet we only occasionally visit, but that we feel is becoming more and more worthy of our attention as the geo-political storm winds begin to batter the region, and financial opportunities present themselves in abundance.
It’s Latin America, and the trade we intend to launch is a play on the extraordinary wealth and prosperity possessed by the region, on the one hand, and the growing desperation and poverty there, on the other. The latter, sadly, is largely the result of gross mismanagement, corruption and negligence.
But first some background.
The ails and travails of Venezuela have been documented in these letters for years. A nation that was once wealthy from its vast oil reserves, the country has since been plundered by doctrinaire socialists and power hungry apparatchiks to the point where nothing is left but a military that is loyal to the ruling clique (who until now have managed to pay them) and an increasingly impoverished citizenry that has nothing to lose by dying in the streets in an effort to improve their lot.
Venezuela Not Alone
But Latin America’s violence and corruption are not limited to that country. Mexico, too, has become a free-for-all murder zone over the last several years, as gangs the size of national armies have executed or otherwise soldiered against local citizens, killing an unbelievable 23,000 in just 2017, a dismal record for that country whose government appears completely unable to control the violence.
Yet murder rates are even higher in El Salvador, Honduras, Brazil, Guatemala and Colombia.
As difficult as it may be to imagine, Latin America possesses just eight percent of the world’s total population but accounts for nearly 40 percent of the planet’s homicides. Eight of the world’s ten most violent nations are located just south of the U.S. border.
Of course, violence thrives in the absence of civil order, and in that regard, Latin America is a model. Things are starting to spin out of control in a broad swath of countries.
In Nicaragua, tens of thousands have recently taken to the streets to protest their President’s repressive policies (25 were killed by government forces in the last week).
In Brazil, where two successive presidents and a host of other elected officials and business people have been jailed or are still under investigation, a number of politicians have also been killed for speaking out against police violence in the cities. Of those cities with the world’s highest murder rate, seventeen of the top 50 are found in Brazil, where annual murder totals average a staggering 60,000 – one tenth of the world’s total!
In Honduras, over 30 are now dead after protests over election-rigging have torn the country apart. And Peru, too, has seen a new wave of angry protests over the pardoning of former President Fujimori who, according to many, is guilty of war crimes that took place during that country’s civil war.
An Island of Stability
Amid the chaos and instability, however, there is one country that has managed to avoid the storm winds, and, though not without its own domestic issues and beleaguered past, has managed to stand resolute as the continent all about it unravels.
That country is Chile, and a closer look at its political economy and markets illustrates why all should be open to its opportunities even as the fires swell to its north and east.
Chile has the highest GDP per capita of any Latin American nation,
- Carries little debt relative to its neighbors,
- Has proven itself fiscally responsible over the long haul,
- Maintains a trade surplus with its trading partners,
- Possesses one of the world’s largest copper and lithium supplies,
- Has a burgeoning middle class, who account for strong local demand of its products,
And is the only OECD member in all of Latin America.
The catch here is that the country is somewhat beholden to commodity fluctuations, particularly copper prices. But with the commodity complex now on the rise, and more likely to come, we see the prospects of the country only improving.
The following is a weekly chart of copper futures for the last three years –
Note especially the trend channel (in red) that has better than two years of historical data behind it and offers at least another 15% rise before it hits the upper edge. Add to that a pennant pattern (in green) that has been developing for better than half a year (pennants are ‘continuation’ patterns), and you have a strong case for more upside for the metal.
In addition to all the foregoing, consider, too, that the election of billionaire Sebastien Pinera last December should also prove a market-friendly development.
Trading in Spanish (and Portuguese)
Clearly, then, it’s Chile on the bull side.
But we’re not so comfortably playing the Chilean market naked, as it were. There are any number of local and global factors that might contribute to a pullback in Chilean equities, not least of which is the stability of those countries that surround, as we discussed above. And while we don’t expect hostilities to ensue between Chile and her neighbors, markets are decidedly delicate creatures, and they have a strong aversion to the sound of gunfire.
That said, we’re going to go head-to-head with another Latin American nation that has become a cause celebre over the last decade, but that’s been looking a wee sluggish of late. And with the current civil discontent plaguing the nation, we can’t see a great upside in the near term – at least not relative to her more stable Chilean neighbor.
That country is Brazil, whose market stacks up as follows against Chile’s –
ECH is the ticker for the iShares MSCI Chile ETF, while EWZ is the iShares MSCI Brazil ETF. The chart shows daily trade for the last three and a half years.
And it also shows that while the markets move in-step directionally, there is a decided and growing outperformance on the Chilean side…
Which we say will continue.- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Pay attention to the expiries. The long ECHs offer two months additional play!
Many happy returns,