Natixis IM: Situation in Venezuela no reason to adjust investment strategies
By Jack Janasiewicz, Portfolio Manager at Natixis Investment Managers Solutions
Over the weekend, US forces took Venezuelan President Maduro into custody, having been indicted back in March 2020 on various U.S. narco-terrorism, corruption, drug trafficking, and weapons-related charges in the U.S. District Court for the Southern District of New York.
While the US armada surrounding Venezuela certainly indicated escalating tensions between the US and the Latin country, the speed and timing of these actions over this weekend were somewhat of a surprise.
Markets showing little reaction, as geopolitical events tend not to have a lasting impact on the global economy. The broader implications of this move are somewhat ambiguous at this point, but Jack Janasiewicz, Portfolio Manager, Natixis Investment Solutions, offers up a few thoughts on the path forward.
First of all, the removal of Maduro leaves a political vacuum regarding the country’s leadership
The U.S. has installed Delcy Rodriguez, most recently the Minister of Petroleum, as acting president, but it’s uncertain whether Interior Minister Diosdado Cabello and Defense Minister Vladimir Padrino, who control Venezuela’s armed forces, will follow her lead.
One option that could emerge in terms of filling the void is that the current leadership remains in power, backed by the military. This dictator-lite scenariowould likely need to see the social-revolution mantra fade with new leadership needing to be much more aligned with US interests. In doing so, this likely means that ties with China, Russia, Iran and Cuba are likely to diminish.
While a peaceful transition of power would be a more ideal outcome, a move to install a democratically elected government might prove to be challenging. With a large number of Venezuelans going into exile over the years in order to avoid the previous Chavez and Maduro regimes, the question over who would have the right to vote poses a serious challenge. Those who have remained in the country are likely those benefiting from the socialist subsidized government which means a likely vote for the status quo. Enabling those who have fled the country to vote likely leads to a resounding right-wing opposition victory.
Should the military move to retain control, the risk of domestic unrest likely rises, creating a political quagmire that benefits no one. Trump has seemingly indicated a limited desire for a structural institutional redesign of the current political apparatus. This likely means a willingness to work with Delcy Rodriguez as she is likely able to keep the country under control while managing the demands and concessions that Washington is desiring.
We have heard much about the vast oil reserves that Venezuela sits upon
Given the dilapidated state of the oil infrastructure within the country, harnessing such reserves would likely take years and significant investment. While President Trump has insinuated that US oil companies stand to benefit from the reconstruction effort, we remain a bit skeptical.
US oil companies report to shareholders and these shareholders require a return on investment. With oil prices hovering in the mid $50/bbl price for spot WTI, the cost-benefit of such CapEx remains questionable. Further production of oil would only push prices down even more, making profitability even more tenuous.
US oil companies have been reticent thus far to expand drilling in far more politically stable regions such as the Permian or Canada’s oil sands. Why should we expect this to change when eyeing the spend required to harness Venezuela’s reserves? And governance concerns are likely to continue lingering given the oil majors certainly haven’t forgotten about asset seizures following the 2007 nationalization of the oil industry.
From a broader geopolitical perspective, the removal of Maduro likely represents a positive development for the region as a whole
Chavez and Maduro have spent years supporting far-left paramilitary groups, creating a backdrop of increased risk associated with doing business in the region. With the funding pipeline likely strangled, waning support should likely prove positive for the longer term.
In addition, with Colombia, Peru and Brazil heading to the polls this year, it will be interesting to see how the voters react to the US intervention in Venezuela. Will the recent string of ring-wing victories in Chile and Argentina continue to play out in the rest of the region or will we see an abrupt halt to this political shift in the rest of South America?
Which brings us back to the Monroe Doctrine – foreign adversaries are not welcome in the Western Hemisphere.
We are seeing a reconfiguring of the global order
“The future will be determined by the ability to protect commerce and territory and resources that are core to national security,” Trump said in his news conference announcing Maduro’s capture.
Venezuela had become a host to a number of US adversaries: China controlling a number of Venezuela’s mining operations; Iranian drone manufacturing facilities within striking distance of the US and Russian military advisers assisting with integrated air defense systems. All too close for comfort in this new bipolar world.
With regards to China, the recent move by President Trump sends a reminder that China is still heavily dependent on imported oil. With almost a third of its energy needs being imported and subject to US disruption, should China move on Taiwan, one would expect those screws to be tightened. China has moved to secure its energy vulnerabilities in recent years but still remains quite dependent on imports from other countries.
As for market outlook, it’s hard to see the actions in Venezuela having any significant long term impact
What do these recent actions have to do with S&P 500 earnings? Nothing really. It’s background noise. Which is what geopolitical headlines tend to be. Just another in a long line of incidents that have trained investors to look through geopolitical noise.