Holly Singer, HS Marketing, & Hedge Connection’s Director of Content
On December 4th, Hedge Connection hosted its End of Year Recap and Holiday Celebration. The event opened with Mithra Warrier of TD Securities moderating a panel of hedge fund managers in a discussion of their Best Ideas for 2020. Each of the managers on the panel will have their best idea featured here on The Edge. Below we have Lee Meddin, Founder & CIO of Sagacious Capital LLC take us around the world with his macro economic views.
Rays of Light in Chile, South Korea and Mexico
It’s always darkest before the dawn. Then, once dawn arrives, we see the first appearance of light, followed soon thereafter by sunrise.
One may think that investing when it is seemingly the darkest may bring the greatest reward. In theory, this may be true, but in practice it’s very difficult to identify the darkest hour. Instead, one should look for the first rays of light following unusually dark periods. Three countries in which we may see such rays of light in 2020 include Chile, South Korea, and Mexico.
Chile
Over the past two years, the S&P IPSA Index has fallen close to 25%. In addition, the Chilean peso has declined relative to the US dollar by a similar amount. If this were elsewhere in Latin America, such volatility may not be surprising. However, this is Chile, one of the most stable economies in the region with a highly respected central bank and a diversified GDP that helps to balance the fluctuations in its most important export, copper.
Chile has been embroiled in protests and violence following a proposed hike in subway fares in October. President Pinera’s approval rating has fallen to 14%. As a result, Pinera has promised higher taxes on the rich (he himself is a billionaire), an increase in minimum wage and pension benefits, better healthcare, and a referendum on a new constitution. Some investors are worried that if these initiatives are not successful and the current center-right government is replaced, Chile’s free markets will suffer. However, Chile has been governed by left-leaning presidents, two of them socialists, for 23 of the past 29 years. During this time, the economy has grown, and the market has prospered. Given this, and current GDP growth of 3.3%, the recent declines seem possibly excessive.
South Korea
The KOSPI Index has fallen close to 20% over the past 2 years. During the same period, the Korean won has depreciated by about 10% relative to the US dollar. South Korea, a developed high-income country, has the 11th largest economy in the world.
One reason for the negative market sentiment is Korea’s current trade dispute with Japan. A year ago, South Korea’s Supreme Court ordered several Japanese companies to compensate 10 forced labor victims from WWII. This drew a strong reaction from Japan which believed the matter had been settled in a 1965 treaty. As a result, each country has revoked the preferential trade status of the other, hurting both economies. Additionally, South Korea is suffering as a result of China’s economic slowdown, the trade war between Beijing and Washington, and a downturn in the semiconductor market. As bad as all of this is, these are likely not structural issues, but rather issues that should be resolved with time.
Mexico
The S&P/BMV IPC Index has fallen around 15% over the past 2 years. During this time, the Mexican peso continued to slowly depreciate against the US dollar, more than 25% over the past 5 years. As the US is Mexico’s largest trading partner, and the US market has advanced rapidly during this period, the two markets seem to be out of sync. This is partially a result of the economic slowdown in Mexico, which itself is unusual because the US economy is still growing.
Andres Manual Lopez Obrador was sworn in as President one year ago. Investor confidence was shaken by a number of his early policy moves such as cancellation of a partly built airport in Mexico City and retreat from opening the oil and gas industry to private capital. Although likely not a result of his policies, the country suffered a mild recession during his first six months in office. Whereas the market has been skeptical of Lopez Obrador as a leftist, he has achieved the kind of cost cutting that eludes many conservatives; he has curbed government spending to build the country’s budget surplus, eliminated thousands of federal jobs, and even sold the presidential jet. He also signed the new trade deal with the US and Canada, USMCA which is replacing NAFTA, although the US Congress has yet to ratify this agreement. With an approval rating of over 60%, providing Lopez Obrador with the political capital needed to fight endemic corruption and enact much needed reforms, coupled with policies more fiscally conservative than many expected, it seems as though the worries about Mexico may be overblown.
There is no guarantee that any or all of these markets will correct in 2020. In fact, civil unrest in Chile could grow, South Korea’s trade issues could worsen, and/or Mexico’s fragile economy could fall back into recession. However, these are markets in which it appears that the darkest hour may soon be upon them, with the first appearance of light soon thereafter. Investing once these rays of light fist appear may position one well to benefit from the market sunrise that comes next on the horizon.
The foregoing content reflects the opinions of Sagacious Capital LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Although only potential long positions are discussed in this article, Sagacious Capital LLC employs a long/short strategy in which short positions may serve as a hedge.
Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
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