Investing in Mexico and South Africa (w/ Rashique Rahman & Ed Harrison)
ED HARRISON: Let's dive down into specific countries. Then we can also at the end, talk a little bit about relative value, what that means in terms of investing. I'm very interested, as you could tell, about Mexico, South Africa, things like that. Talk me through now that we have the macro picture for the dollar side of things of Mexican investment or the preconditions within Mexico for that. RASHIQUE RAHMAN: Looking at Mexico, it's interesting because you have Lopez Obrador, who's more populist and pushing for social reform and things of that nature, he's less focused on growth, which isn't necessarily a good thing for Mexico in terms of forward-looking trajectory. Like I mentioned, Mexico, South Africa, poster child in a sense for lack of investment which will have adverse impacts on growth going forward. Mexico's a real example of that, unfortunately. The focus on social reform and things of that nature is taking the eye off, I'd say, deeper structural reform that will benefit the economy. That's a real issue for Mexico. The positive side of it, though, is that the country remains fiscally prudent, the initial conditions are relatively favorable for Mexico, so it's going to be a slower burn, I'd say, to that end. You can't countenance that with say, in Brazil, where there's more of a focus on moving towards structural reform efforts that benefit the economy. It's going to be a challenge politically, but I think that's you can look at Brazil a bit more favorably from that standpoint. South Africa concerns me deeply. They're in a vicious trap, a fiscal growth trap that's going to be very hard for them to get out of. I think 2020 could be seminal for South Africa in that respect. What's really going to be important is that they get their fiscal house in order to avert a credit rating downgrade by Moody's, which could trigger force selling their local debt, because it's in one of the most representative global indices and could drop out on a downgrade. I think that's more than likely to happen. It's only a matter of time. I think it happens this year at some point, the downgrade and that will lead to force selling. I'm quite concerned about market dynamics for South Africa. It's similar to what happened in Brazil in 2013, the dislocation we saw there as a result of fiscal slippage in growth, and it's the same dynamics we're seeing in South Africa playing out so that's a market that I would be quite cautious on in 2020. I think we're going to see a potential disruption there. Absence, very, very concerted efforts by the government to address the fiscal slippage that we're seeing there. ED HARRISON: When you look at relative value plays, it sounds to me like South Africa is for sure one of the countries that's on the negative side of that, or has the market cottoned on to this and therefore, the price could contract there. RASHIQUE RAHMAN: No. Not at all. In fact, the market's taking a more benign view generally of the scope for this occurring, so I think the market's not priced for, I'd say, potential fiscal deterioration and the market disruption that could result from that. South Africa is certainly on the sell list. The currency, in particular, and local rates, we'll see the biggest adjustment in there, I would say. ED HARRISON: I have heard about South Africa being a country potential in 2020 to get downgraded, and therefore, there's a bet risk there. Are there any other countries in particular that you'd put in the same bucket for 2020? RASHIQUE RAHMAN: We talked about this earlier, Colombia is one that's in scope as well. Why? Because you've seen some political tension and that may limit the scope for the government to institute a reform agenda, and that could lead to disruptive market outcomes potentially. That's not as acute I'd say as in the case of South Africa, but if you look at it from a valuation standpoint, the currency in South Africa to me is overvalued, in Colombia, it's also overvalued, so that puts it in that category of markets where you could see underperformance. JUSTINE: If you're ready to go beyond the interview make sure you visit realvision.com where you can try real vision plus for 30 day for just $1. We'll see you next time right here on real vision.