Latin America is having a very interesting couple of weeks. From Brazil with the pension reform voting process, Argentina almost to the verge of elections and the region fighting trade wars with new deals.

As I am writing this note, the social security is being voted at the lower house. Yesterday the opposition tried to veto the vote but it was broadly denied. This was a strong statement of how consensus this reform is. The probability of it being approved is then very high, which wasn’t as sure just a couple of weeks ago. A structural change is taking place in Brazil and not everyone is looking as close to notice. As we have discussed, three years ago this was unimaginable. Today we have both population and congress support, which has taken a much more progressive approach. The situation from a fiscal account has become so critical that it is a matter of how rather than if. And savings (against our own assessments) look higher than expected. Brazil is entering in a new normal, with lower sustainable rates, lower inflation and therefore lower discount rates. Valuations will seem at a premium but looking at historical multiples this time will be misleading.

And pension is just the start, is the bottle neck for many more reforms that are actually starting to advance since this week. In particular, tax reform and concessions (PPI) account for almost the same amount of savings as pension and they are starting to be arranged to present to congress as soon as the pension reform passes, taking advantage of political momentum. Flows to Brazil YTD have a net outflow of US$ 105 mm, so clearly this is not a crowded call…yet.

Argentina is also in an interesting situation. Even though electoral polls show results will be like a flip of a coin, there are two things certain: the economy is starting to show green shoots and Macri and Pichetto association is very strong from a political view. If Macri does get reelected this is not only positive for the country but for all the commercial relation between the region that used to be very strong a few years ago.

And commercial relations are a relevant issue in today’s world. Will so many trade deals questioned, a region establishing new ones is an interesting opportunity. Two weeks ago the EU-Mercosul got an agreement regarding a new trade deal that affects 770 million consumers. This is the biggest commercial agreement between the two region in their history.

Always we need an exception to the rule though, and this is Mexico. Even though AMLO has turned out to be better than original fears, we still have big concerns regarding his administration, potential growth and corporate profits which makes us underweight the country. Just yesterday the finance minister resigned alleging conflict of long term view regarding strategical economic decisions. This was one of the markets favorite constituents of AMLOs government.

Latam is in an interesting spot. With low comparison base in terms of earning, especially for Brazil and Argentina, structural changes and new trade deals in a world going in the opposite direction. We do believe the sun will come out tomorrow, and hopefully it will be a new normal.