An update from our investment manager, Viktor Szabo
The Latin American economies were one of the last Emerging Markets to face covid-19 contagion and as such one could expect government authorities to be in a better position to act to the health crisis as and when. Whilst countries such as Chile, Colombia and Peru seem to have taken firmer actions in early days to avoid agglomeration and the spread of the virus, Brazil and Mexico have been slower to react. Would also note that from an economic impact point of view, in a first stage policymakers in the region were expecting the main impact from covid-19 to come from lower global growth, it is now becoming evident that the impact to the region's economic growth should be larger from both the effect of a likely contracting global economy, but also from the significant impact that social distancing measures and quarantines should cause on domestic supply and demand and the imminent secondary effects on the economy as a result.
Mexico in particular hasn't yet announced specific measures aiming to contain the virus contagion, instead authorities have focused efforts on providing market liquidity. Coming to Brazil and where we can give a better grasp of the situation on the ground, the Bolsonaro administration which was previously on what seemed to be nearly a denial mode to accept and react to the covid-19 pandemic, has in recent days taken a more pro-active approach and announced measures to contain the crisis. At a country level they announced the closing of all of its land borders to neighboring countries and imposed travel restrictions from foreigners coming from Europe and Asia.
Other measures have come in different forms via state governors and municipalities, but in Sao Paulo for example, the city which has the largest number of cases officially confirmed so far (240 at time of writing) it has been decreed that shopping malls and gyms be closed until end of April and we have seen as well some businesses proactively shutting down stores at a national level such as our holding Lojas Renner and the food chain McDonalds. Schools and universities have been shut and the population has been strongly advised to stay at home and work from home. Traffic of vehicles and people on the streets have been declining day by day.
On the fiscal front the government has announced some measures at the federal level aiming to provide relief to lower income families and providing some flexibility for companies in terms of working hours and salaries and temporarily suspending the collection of some taxes. On the monetary front, the CB cut interest rates this week by another 50bps to a record low level of 3.75% and there are expectations that there will be support provided to banks via additional liquidity measures and allowing more flexibility for these entities to renegotiate credit with clients.
As a result of all the above we have seen consistent downward revisions to GDP estimates, with some economists still expecting the Brazilian economy to grow around 1% this year from a pickup in 2H but some houses have cut GDP estimates to a 1% recession.
With regards to our companies we have been focusing the analysis on their financial strength and available liquidity to withstand the ongoing crisis and believe that they are in most part in good shape especially on a relative basis, as well as their responses to the crisis, which so far we have seen reactions coming quite quickly. But it is still very early days to try and assess how long this halt will last and the ultimate impact on the local economies and on our holdings as a result.
