The 'Trump Effect' On Latin America, Explained

“So far, we can only go by Trump’s campaign speech and a few ideas that his advisors have let become known,” Diego Martinez Burzaco, chief economist at the world’s leading Spanish-language financial analysis firm, Inversor Global – an Agora Inc. partner, told Benzinga in a recent interview. “Obviously, we’ll begin seeing the truth starting January 20, when Trump takes office and commences to execute certain monetary policies.”

Up to this point, his discourse seems quite protectionist, and this could mean that the free trade relationship between the United States and Latin America could be debilitated, the expert added.

The TPP And NAFTA

Last Monday, President-elect Donald Trump said he would withdraw the United States from the Trans-Pacific Partnership (TPP) on his first day in office.

“[This treaty] also includes Chile and Peru, so the impact of higher protectionism will be felt in Latin America, without a doubt,” Martinez Burzaco went on to explain.

For instance, Argentina was negotiating with the Obama administration to reopen the export of Argentine lemons and its world-famous meat. Now, these discussions have been put on hold on the back of the “Trump effect.”

A few companies to watch as the situation unfolds are Cresud S.A.C.I.F. y A. (ADR) CRESY and Adecoagro SA AGRO, which have positions in Argentina’s fields and a focus on exports. On relative terms, Cresud’s valuation is quite attractive at current levels, Martinez Burzaco voiced, especially because many of these fields are undervalued after Argentina’s crisis.

Discussing the potential withdrawal from or renegotiation of the NAFTA, he added that his first impression is that Trump will favor the bilateral trades that benefit the United States the most. “Large Latin American economies might be the ones that receive the most attention in Trump’s agenda.”

Potential winners from these bilateral trade include Mexico, and, to a lesser extent, Brazil and Argentina where pro-market governments are in power.

Interest Rates

Moving on to interest rates and Trump’s long-standing criticism of low interest rates, Martinez Burzaco said:

The market is assuming that, on December 14, the Federal Reserve will hike its benchmark interest rate. Now we’ll have to see if this is a transitory effect or a permanent effect of a new upward interest rates trend. If interest rates go up, the U.S. dollar will undergo a strong appreciation, and this is a synonym of weakness for raw materials, which are so relevant to Latin American economies.

The expert believes the market somehow overreacted to the possibility of higher interest rates and a stronger dollar (see the relative move of 10-Year U.S. Treasuries, the CBOE Interest Rate 10 Year T Note TNX and the iShares Barclays 7-10 Year Trasry Bnd Fd IEF), and this should ease in the next few weeks. Moreover, as we discover how protectionist the Trump administration really is, the 2017 outlook for Latin America will readjust to what Martinez Burzaco expects will be a slower-than-expected hike of interest rates.

Currency Implications

Benzinga then asked about currency pair trades.

“I am no expert on currencies, but what we’re seeing is that the jump in emerging currencies' valuations following the Trump win has gradually re-settled [...] I think that the strong tumble in the Mexican peso could open a trade opportunity there, if one were to bet on it being an overreaction of the market, especially taking into account how big the trade between the U.S. and Mexico is — which could drive to a re-appreciation of the Mexican peso in the short term.”

Nonetheless, he added, this is not a trade to be long Latin American emerging currencies unless we witness a reversal of the U.S. dollar’s robustness on a global level and an amelioration in raw materials.