Walter Molano | Miami insights

Last month, we held our annual conference in Miami. Besides enjoying the great weather and tropical scenery, we used an interactive format by which questions were embedded in the presentations.

The audience could participate by replying to each question through a dedicated remote. There were three types of answers: numerical - where the audience could type in an answer; yes or no - where respondents could type a one or two to represent the affirmative or negative; and multiple choice - where respondents could select from an array of possible answers, usually one to five. The first questions were macro in nature. They were asked where they thought oil prices would be by the end of the year. The answers were grouped in four buckets: 20-40; 41-60; 61-80 and 81-99.

Approximately 72 per cent of the respondents picked the 61-80 bucket, 25 per cent chose 41-60 and three per cent picked 81-99. This reflected a consensus that oil prices would remain within the current range, but with a small bias towards lower oil prices. However, it rejected the hypothesis that oil prices would collapse.

The second question asked how many more times the US Federal Reserve would hike interest rates. This question was asked on the day after the Fed had just raised interest rates. Approximately, five per cent of the respondents replied once more, 40 per cent said two more times, 43 per cent indicated three more times and 11 per cent said four more times. This suggests that Fed funds should finish the year above 2.5 per cent, which is higher than the Fed's guidance.

The next set of questions focused on the outlook for the United States economy. Some 75 per cent of the audience expected the economy to be the same or stronger. Not surprisingly, 85 per cent expected to hold the same level of risk or add risk this year. The responses also showed that people were not too concerned about the domestic or geopolitical situations. They were more focused on economic factors.

The next sets of questions were country specific, starting with Brazil. Regarding the presidential elections, 37 per cent expected Jair Bolsonaro to win. Only five per cent thought that Lula could win, and the rest were split on Marina Silva, Ciro Gomes and Geraldo Alckim.

Interestingly, 78 per cent of the respondents said that they were increasing their risk exposure in Brazil, and almost half of them said that they would express that view through corporate debt. A third said they would do it through equities, and only 10 per cent said that they would do it through the currency markets.

What Argentina had to say

The next questions were on Argentina. When asked about former President Cristina Fernandez de Kirchner, 86 per cent thought she would end up in jail. However, 81 per cent said that they were either going to hold or reduce their exposure to Argentina, reflecting a negative bias towards the country.

When asked how they would invest in the country, 48 per cent said through the corporate debt market. Only seven per cent said they would do it through the currency markets.

The third sets of questions were on Colombia. When asked who would win the presidential elections, Petro or Ivan Duque, 92 per cent chose the latter. However, when asked what percentage of their clients would leave the country if Petro won, the replies were less than 20 per cent. Nevertheless, all of them replied that their clients would move some assets out of the country if the leftist candidate won.

The next to last question was on the Mexican elections. More than 85 per cent of the respondents gave AMLO a better than 50:50 chance of winning the elections. This was in line with recent polling data.

Last of all, people remained very negative on Venezuela, with 57 per cent replying that it would be the dog of the year - despite the ongoing rally in Venezuelan sovereign and PDVSA bonds.

Sense of optimism

The responses reflected an overall sense of optimism in the market, despite the ongoing charade in Washington and on the geopolitical stage. This was motivating investors to increase their risk exposure, despite acknowledging that the Fed will continue to raise interest rates. The country that attracted the most attention was Brazil.

People were increasing their exposure to the country, despite their recognition that it could fall under the control of a right-wing populist leader. At the same time, there was a great deal of pessimism in Argentina, despite the fact that the leader of the left was probably going to end up in jail. In both the cases of Brazil and Argentina, there was a bias in favour of corporate debt and away from local currency issues.

Last of all, people were convinced that the centre-right candidate would win in Colombia. However, a victory by the left would not lead to a mass exodus, but there would be some capital flight.

The conclusion that could be made from the data was that economics remains the main driver of investor behaviour. Investors are very cognisant of the political factors and risks, but economic conditions are the main factors in shaping their investment decisions.

 -Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com