• York Investment & Finance

Global Markets Overview: Latin America

By Tom Ives, Analyst at the York IFS Global Market Telegraph

Latin American markets slump as coronavirus crisis intensifies, Argentinian energy sector receives boost as YPF avoids default and will the formation of the S&P/B3 Brazil ESG index help in the fight against climate change? Further delays to vaccine rollouts have tarnished hopes that Latin America can finally begin to recover from the pandemic as once expected. LatAM stocks enjoyed a bullish run in the latter stages of 2020, with investors believing the coronavirus crisis could be entering its final stages. However, a sudden resurgence in infection rates across Latin America soon dampened investor sentiment. After a weak start to the calendar year; the MSCI Latin America index pared losses tracking momentum in oil prices. Once news surfaced that FDI inflows into the region reached record-highs in the past month, the index managed to record strong gains as investor confidence matched the sentiment in Latin America.

However, the rapid spread of the virus meant that this optimism was short-lived. Investor sentiment soon waned once the potentially more contagious Brazilian variant of coronavirus began to dominate news across the world and, in turn, unnerved investors. This saw the index reverse earlier gains to record a fifth successive week of losses.

The Ibovespa index, seen as the benchmark for Brazilian firms, ended the week flat in volatile trading as investors weighed the positives of the newly formed ESG index against a backlog of bad publicity surrounding President Bolsonaro. The 'S&P/B3 Brazil ESG index', jointly launched by the S&P 500 and the B3 Bolsa Exchange (the national Brazilian stock exchange that trades all listed stocks in Brazil), has been implemented to facilitate the transition towards renewables in Brazil. Whilst the increased focus towards sustainability marks a major milestone for the nation, the formation of the index has not been well received by investors. Some investors harbour scepticism about its formation, which is perhaps understandable given the alarming rates of deforestation in Brazil combined with Vale and Petrobras' prominence. One could argue that this undermines the credibility of the index given the two firms focus primarily on extracting non-renewables, with Vale extracting vast quantities of iron ore and Petrobras exploiting Brazil's crude oil resources.

Both firms have taken steps in reducing their own impact on the environment. Petrobras has promised to invest $1 billion into reducing their carbon emissions by 25% by 2030 [1], whilst Vale plans to lower its total emissions by 15% by 2035 [2]. However, this should be taken with a pinch of salt given the current political climate, which starkly contrasts against ESG initiatives. Bolsonaro has given strong backing towards industries that exploit non-renewable resources in recent years. However, if the index can influence Brazilian firms to align their interests towards ESG values as planned, this could be a promising and much-needed step in the right direction.

Further benefits could materialize as firms that incorporate ESG factors appear more reliable and less risky by foreign investors. The associated risk of LatAM stocks is one of the primary deterrents for investors from abroad. Still, the record-high inflows that Latin America has enjoyed over the past month could continue if investors can look beyond Brazil's recent actions. However, President Bolsonaro must invoke radical change to win over sceptics.

However, he has come under further scrutiny to disband the task force in 'Lava Jato' as tensions continue to escalate in Brazil. The anti-corruption probe' Lava Jato' has arguably been the most successful operation in Brazil's fight against corruption. It has held many key business people and firms accountable for their actions over the past years, most notably Vitol. Following the investigation by the 'Lava Jato' probe, the world's largest independent oil trader was fined over USS 160 million after allegedly trying to manipulate oil benchmarks [3].

Struggling Argentine energy firm YPF has seen its share price surge by over 8% in the past week [4]. The energy giant finally managed to agree terms with its creditors regarding the restructuring of their debt. It is understood that creditors, which include the likes of Fidelity and Blackrock, have finally agreed to allow YPF to rollover interest payments on bonds that mature in 2021. The agreement also stipulates that the deadline for maturity for US$2 billion in debt payments will be pushed back to 2023 [5].

This is much-needed good news for the state-owned firm, which have struggled to stay afloat during the pandemic. Weakness in the oil price during 2020 and local foreign-exchange currency regulations imposed by the Argentinian Central Bank has weighed heavily on revenues. The Central Bank introduced restrictions to peg the Argentinian Peso at an acceptable level against the greenback. However, the restrictions only enabled a fixed amount of local currency to be converted over this period. Consequently, this rendered the energy fund unable to fulfil its debt obligations as the firm could not access adequate levels of the US dollar needed to repay its debt.

If the agreement regarding debt restructuring can be formalized, both bondholders and investors could be set to profit from new investment. To stimulate a faltering Argentinian energy sector, it is believed that YPF will reinstate the US$413 million in interest payments into further developing the Vaca Muerta shale field. Whilst it is unlikely production levels will reach those of the US as once desired, the shale-rich region in Patagonia could help rejuvenate the Argentinian economy.

This article was first published in the University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 2 in late February 2021.

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[1] https://www.bloomberg.com/news/articles/2020-12-02/petrobras-ceo-calls-net-zero-a-fad-echoing-exx on-s-focus-on-oil

[2] https://www.spglobal.com/platts/en/market-insights/latest-news/coal/120220-vale-targets-15-cut-in-sc ope-3-emissions-by-2035-invests-in-solar-energy

[3] https://www.swissinfo.ch/eng/business/vitol-pays--160-million-to-settle-petrobras-related-fraud-case/4 6203348

[4] https://finance.yahoo.com/quote/YPF

[5] https://www.nasdaq.com/articles/argentina-eases-rules-for-exporters-raising-dollar-debt-may-help-ypf2021-02-05


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