Turmoil In Honduras, Argentina: Latin American ETFs in Focus

by on June 29, 2009

Separate dramas began to unfold over the weekend in Honduras and Argentina, attracting attention from an international community that has been largely fixated on the happenings in Tehran for the last two weeks. In Honduras, President Manuel Zelaya was exiled at gunpoint to Costa Rica, while in Argentina, president Christina Kirchner suffered a surprising setback in the congressional elections, losing majorities in both houses of Congress. While the impact of these events is yet to be determined, both have potential to seriously undermine stability in a region that has struggled to find its economic footing in the wake of the global financial crisis.

Military Coup In Honduras

In Tegucigalpa, president Zelaya, who had been engaging in a controversial campaign to reframe his country’s constitution, awoke to gunshots during a predawn raid and was forced to board an airplane bound for Costa Rica. According to reports, Honduras’ Supreme Court gave the order on Sunday for the military to detain Zelaya. Later, Congress named Roberto Micheletti as Zelaya’s successor until the end of his term in January. “What was done here was a democratic act,” Mr. Micheletti said to an ovation. “Our constitution continues to be valid, our democracy continues to live.”

Zelaya called the act a kidnapping, and insisted that he was still president. Venezuelan president Hugo Chavez, a close ally of Zelaya, announced that he would consider it an “act of war” if there were hostilities against Venezuelan diplomats. “I have put the armed forces of Venezuela on alert,” said Chavez, a promise that no doubt caught the attention from the U.S. In Washington, Barack Obama condemned the coup, saying he was “deeply concerned” with the developments. Zelaya, a frequent critic of U.S. policies, had been pushing a referendum that would have abolished term limits, allowing him to run again for office in early 2010.

Central American leaders, including Zelaya, planned to meet Monday in Nicaragua to discuss the situation, and the U.N. General Assembly also planned to address the matter. In Honduras, television stations were off the air and electricity was out in part of the capital. Military jets flying overhead recalled countless coups that have destabilized the region over the last several decades.

Political Coup In Argentina

In Argentina, president Kirchner’s party lost key races throughout the country, leaving them without a majority in either house of Congress. Mrs. Kirchner’s husband and predecessor, Nestor Kirchner, lost a bid for a seat in the Buenos Aires province as well. Christina Kirchner’s popularity has plunged since she took office in late 2007, impacted by a weak economy and a well-publicized dispute between the government and farmers over a grain tax. In the last twelve months Kirchner has tried to boost the government and her appeal by nationalizing several companies, including an airline. While some believe the election reflects disenchantment with the Kirchner administration, others fear that the results may be indicative of more regional trends, suggesting a decline in popularity of populist governments that have popped up throughout Latin America, including in Venezuela, Ecuador, Honduras, and Nicaragua.

In Argentina, where voting is mandatory, accusations of electoral fraud were rampant as counterfeit paper ballots appeared in certain regions. During the Sunday elections, many officials wore surgical masks, as fears of swine flu contamination are still rampant in the region.

ETFs to Watch

After experiencing years of strong growth, many Central and Latin American economies have been hit especially hard by the global recession, with many expected to contract slightly in 2009. Despite ongoing tensions between Venezuela and the U.S., the regions have enjoyed relative stability in recent years, a far cry from the frequent coups and violence that have plagued the continent in the past. But these developments put all of that at risk, as the situation in Honduras threatens to divide national governments and the election results in Argentina present the possibility of a changing political landscape. As these situations develop, here are three ETFs to keep an eye on:

  • iShares S&P Latin America 40 Index (ILF): This fund offers exposure to more Latin American economies, and is weighted heavily with Brazilian, Mexican, and Peruvian equities. Although none of these countries are directly impacted by the weekend’s events in Honduras and Argentina, to the extent a regional crisis develops, the economies of these more advanced South American countries could be impacted.

ILF Focuses on Brazil, Mexico, and Peru

  • SPDR S&P Emerging Latin America (GML): This ETF is also dominated by Brazil and Mexico, although it does maintain more exposure to Chile than ILF.

GML Is Up More Than 40% in 2009, But Now Faces the Threat of Regional Instability

  • iShares MSCI All Peru Capped Index Fund (EPU): iShares’ most recent fund addition, EPU is the first ETF to hold exclusively Peruvian equities. Boosted by a free trade agreement with the U.S. and rising commodity prices, Peru has been the star of South America, consistently posting high single digit growth rates over the last several years. Just as U.S. investors were provided easy access to the country’s capital markets, fears over regional instability are forming, presenting a potential speed bump in plans for continued expansion.

Disclosure: No positions at time of writing.