A Latin love affair

China is South America’s top trading partner

China has surpassed the US as South America’s top trading partner.

China’s ties to the region date back to the sixteenth century, but today is it a partner or a predator?  It is also a major source of foreign direct investment and lending in South American energy and infrastructure projects, including through its Belt & Road Initiative (BRI). China has also increased it diplomatic, cultural, and military presence across Latin America.

Washington is now looking to re-establish the US presence in the region. Pushing through new trade and investment, to stem Beijing’s ascendancy.

The World Economic Forum (WEF) estimates that between 2000 and 2020 that trade between China and Latin America has grown from £9bn to £240bn and forecasts that this could hit £600bn by 2035. This reflects China’s demand for natural resources such as iron ore, copper, and lithium as well as well as food particularly soybeans, dairy and cattle produce.

The WEF believes China’s state-owned banks including the China Development Bank have provided over £100bn of loans to countries such as Brazil, Ecuador, and Venezuela to access these nation’s rich natural resources. In Brazil, China Merchants Port Company has acquired a 90% stake in the operator of Paranaguá, the country’s second largest port.

Besides investing in Latin American natural resources and infrastructure assets, China has supplied defence equipment to many countries. Furthermore, it has been accused of supplying surveillance systems and technology to enable populations to be monitored and Huawei has been building its presence in the region.

If this all sounds familiar, it is as we have written about China’s BRI strategy in parts of Asia and Africa previously. Likewise, we have covered Western concerns about the risk to national security from the use of Chinese technology. Alongside the BRI, China has opened 28 Confucius Institutes in Latin America. China says these are intended to improve the understanding of Chinese culture and language around the world. However, more western countries are becoming concerned that they could be used to spread propaganda, interfere with free speech, or even spy on attendees.

Tension between the US and China remain elevated. While the focus remains on Taiwan, behind the scenes Beijing is steadily increasing its sphere of global influence and notably in America’s backyard.

What have we been watching?

Markets remain a bit like our weather – mixed!  A key week with the release of the latest global business activity indicators which were a bit subdued and interest rate decisions by some leading central banks. The US Federal Reserve (Fed) And European Central Bank (ECB) both delivered the expected interest rate hike but there was an unexpected potential policy change from the Bank of Japan, which announced a change to its bond buying programme. Meanwhile, there were signs that Beijing is determined to shore up Chinese economic growth, although a major stimulus package is still lacking.

 

In the UK, the composite ‘flash’ PMI business activity indicator dropped to a six-month low of 50.7 in July which was below expectations. Within this, the manufacturing PMI dropped to a three-year low of 45.0. A figure below 50.0 denotes contraction in activity. The service sector PMI dropped to 51.4, the lowest reading since January. Meanwhile, the Bank of England has brought in former Fed Chair Ben Bernanke to review why it got its inflation forecast modelling so wrong!

 

In Europe, the ‘flash’ composite PMI business activity indicator dropped to 48.9, the lowest reading since November. The PMI manufacturing activity indicator was lower than expected in July at 48.9. Within this, the German manufacturing PMI dropped to 38.8. The ECB raised interest rates by 0.25% to 4.25% as expected. ECB President Christine Lagarde said that at its next meeting that there could be another hike or a pause but that there would not be an interest rate cut.  

 

Business activity in the US rose at a weaker pace in July, as manufacturing recovered somewhat but service sector growth slowed. The ‘flash’ composite PMI was 52.0 in July with manufacturing PMI up to 49.0 while services slowed to 52.4. ‘Flash’ durable goods orders were strong. The Fed increased interest rates by 0.25% as expected to 5.25%-5.5%, while leaving the door open for further rate hikes. However, markets are still assuming that the Fed is getting closer to peak of interest rates.

 

Japanese business activity improved for the seventh consecutive month in July with a ’flash’ manufacturing PMI of 49.4, although demand conditions are reported to have been less buoyant than before. The Bank of Japan did not officially change policy but talked of not allowing bond yields to rise above 1% against the currency ceiling of 0.5%. This is significant news as Japan was effectively the hold out country on QE.

 

China’s 24-strong politburo held its annual meeting and state-media reported it was facing ‘new difficulties and challenges.’ Beijing appears determined to shore up faltering economic growth but appears to be considering targeted support rather than ‘big bazooka’ stimulus measures.

Read our latest investment insights from Alpha PM

 

Brent oil moved up to $85, the highest level since April as markets considered the additional supply cuts from Saudi Arabia.

Finally, the ‘Magnificent Seven’ but not the film starring Yul Brynner. The US tech index NASDAQ has undertaken its second ‘special re-balancing’ in 25-years. This will see the combined index weighting of the seven largest stocks in the NASDAQ 100 such as Apple and Microsoft reduced from 56% to 44%. This is significant given the more than $250bn of passive benchmark-tracking strategies. However, the previous re-balancing didn’t move the NASDAQ index much while US investors still appear caught up in the AI frenzy.

Cartoon credit: Arcadio Esquivel, Costa Rica

Read Last Week’s Alpha Bites – Debanking

 

Further information about Alpha Portfolio Management, our products and services, please visit www.alpha-pm.co.uk or email info@alpha-pm.co.uk. Alternatively, you can call us on 0117 203 3460.

This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the FCA.
Registered Office: 1 The Square, Temple Quay, Bristol, BS1 6DG. Registered in England No. 2489639
Copyright © 2021 Alpha Portfolio Management, All rights reserved

Full version