BREXIT, BRAXIT and TRUMXIT

The UK referendum has thrown the nation into upheaval the Prime Minister David Cameron has had to resign and speculation is growing that Scotland, where citizens voted overwhelmingly to stay in the EU, will seek a new referendum on sovereignty. Global Ratings agencies circling overhead at a wounded British economy removed the UK’s coveted  AAA rating.

Politicians now appear to have no plan on either side to deal with the referendum scenario that we have been left with, the only thing we know for certain is that they will eventually have to haggle with our former European partners in protracted Brexit negotiations that look like they will last some two years. This creates a climate of uncertainty that will almost certainly continue to hang over Europe’s markets and prompt US and European central banks to keep stimulus intact for longer than anyone had ever planned.

Set this against a back drop in Latin America where most countries are going through a period of relative calm. In Argentina, President Mauricio Macri has spent his first months in office taking steps to remake the economy more friendly to investors. And Brazil seems closer to resolving a months-long political standoff as acting President Michel Temer takes the reins while Dilma Rousseff awaits an impeachment trial, indeed the United States and Germany have both now recognised the Temer Government legitimising the processes that have got him into the top job in Brazil.

Political overhauls in Brazil and Argentina driven by former Wall Street bankers in government posts are winning back investors after years of recession and spendthrift policies that swelled budget deficits.

The earliest signs of a potential future Brazilian recovery are starting to be felt; Aberdeen-based oil services firm Wood Group has just won a multi-million-dollar contract off the coast of Brazil. It will provide engineering, design and procurement services for wellhead platform C in the Peregrino field which is 60% owned and operated by Statoil, with a further 30% on obligatory cessation to Brazilian State giant Petrobras. This would have been unthinkable just a couple of months ago.

Whilst this must not be seen as a shifting of the sands, Brazil's first quarter GDP growth of -5.4% year-on-year sounds devastatingly bad, but such is the state of the Latin American economy that it is actually an improvement.

The figures were better compared both to expectations and to last quarter’s performance. Still, -5.4% is hardly cause for celebration, and 2016 will not be a banner year for the economy.

A breakdown of the data reveals that the improvement was driven by stronger government spending, net exports, and investment. Government spending is unlikely to be much of a driver going forward given planned austerity, and this increase at least partially reflects the attempts by the outgoing president, Dilma Rousseff, to shore up support with largesse for her base.

The contribution of net exports, boosted almost entirely by better export performance, can be attributed to the weaker currency and lower unit labour costs. This should persist for most of the third quarter, after which the currency impact will begin to fade.

Perhaps most interesting though is the performance of investment. Although still contracting, it was much less of a drag than in the fourth quarter, so it stands to reason that on the surface, the formation of a new government has returned some investment confidence to the economy.

If this narrative is correct, any potential revival is going to be held hostage to further political developments, and on this point almost daily news emerges of deeper corruption by all parties in power in Brazil, and this could put the revival at risk of a reversal, which could lead to a Braxit, as foreign investment votes to leave Brazil in favour of safer climates.

If this sounds familiar, almost the exact same lack of confidence is what is fuelling losses in the established world markets following uncertainty as a result of the Brexit vote, the major difference seems to be that at least Brazil appears to have a plan to get out of trouble!!

Markets tend to be driven by narratives. Despite all the hyped technical and mathematical financial analysis, humans like a story. The old economies of Western Europe and the United States had been losing momentum during the closing stages of the last century, and by the millennium. The worlds developing markets were the place to find growth, the largest group were called BRICS (Brazil, Russia, India, China & South Africa), these collectively spurred huge growth, and investment friendly governments were all too eager to accept the influx of capital looking for a soft place to be injected.

The global financial crisis drove the plot forward, as China seemed to recover early, giving rise to much talk of China’s Century, along with signs of growth in the surging oil fuelled Russia and Brazil. But these story lines were lost, as the United States steadily recovered and the BRICS encountered challenges: China a possible debt bubble, Brazil and Russia, falling oil prices among other drama, South Africa’s ongoing political turmoil and India’s stubborn resistance to inbound capital despite so much that was positive.

The story line of Capital Searching for a Home had swung hard West, driving a flood of cross-border investment into the United States and Europe, particularly the UK, with a special lust for London, everyone’s second city. At the very least, Brexit hits the pause button on this last bit. Foreign capital will likely now wait to see how it all settles over the next two years–a lifetime in investment terms–before returning. At worst, who knows.

The immediate beneficiary of this will be the United States. New York had already become the “new London” before Brexit. But while jobs in The City may go to Dublin and Frankfurt, cross-border investment will more likely head towards America for the safety and stability it had sought in London. This will be further driven by concerns about what the EU will be like sans the UK, or so the story line will go.

Having said all that the United States is perfectly capable of squandering and wasting this moment all on its own with a home grown Trumxit – the election of a wall-building, Muslim excluding, immigrant expelling, trade-deal breaking President.

For my part and as someone who has invested on a number of occasions in building successful companies in Latin America, now seems to be the perfect time to invest in Brazil, yes it is risky, but this vast nation still needs infrastructure investment – roads, buildings, ports, telecommunications, utilities – to expand economic progress across its 3.3 million square miles. The corruption scandals involving state-controlled oil company Petrobras and local construction firms have slowed progress on government concessions, but shrewd new players from abroad and companies with smaller market shares may find growth and partnership opportunities within a corruption-weary government and private sector.

Technology giants such as Amazon Web Services, IBM, and Salesforce continue to invest in Brazil as a large and important market for their cloud-computing businesses. In fact, many e-commerce and tech companies are finding fertile ground in Brazil. A recent World Bank study ranked Brazil fifth globally in the number of Internet users. Yet, the Brazil Communications Ministry reports that 45% of the population over 10 years of age, or approximately 80 million people, still do not have Internet access, indicating a huge opportunity for growth.

Looking for signs that the timing is right? Consider foreign direct investment of more than $11 billion in the first two months of 2016, which followed December 2015 inflows of more than $15 billion, more than twice the expected total. The U.S. Dollar goes much farther following the nearly 50% drop in value of the Brazilian Real in 2015. U.S. and Asian companies have recently planted stakes in the energy sector, and travel and tourism players have investment plans that extend far beyond this year's Olympic Games. These movements show that companies are investing now to build strong post-crisis positions. All of this can only signal good news for the Insurance market as it looks to new havens to invest in.