Election test for Venezuela bond fans

October 5, 2012

Investors who have been buying up Venezuelan bonds in hopes of an opposition victory in this weekend’s presidential election will be heartened by the results of a poll from Consultores 21 which shows Henrique Capriles having the edge on incumbent Hugo Chavez.  The survey shows the pro-market Capriles with 51.8 percent support among likely voters, an increase of 5.6 percentage points since a mid-September poll.

Venezuelan bonds have rallied hard ever since it became evident a few months back that Chavez, a socialist seeking a new six-year term, would face the toughest election battle of his 14-year rule. Year-to-date returns on Venezuelan debt are over 20 percent, or double the gains on the underlying bond index, JP Morgan’s EMBI Global. And the rally has taken yields on Venezuela’s most-traded 2027 dollar bond to around 10.5 percent, a drop of 250 basis points since the start of the year.

But Barclays analysts are advising clients to load up further by picking up long-tenor 2031 sovereign bonds or 2035 bonds issued by state oil firm PDVSA:

Our opinion has been that the market has been underestimating the chances of an opposition victory. We believe an opposition victory could be a positive surprise for the market that could push Venezuelan assets to levels not seen in the past five years.

What if Chavez wins after all? That would mean another six years of the Bolivarian Revolution and Chavismo (Chavez’s leftist social and political movements, the former named after  the country’s 19th century liberation hero Simon Bolivar). But it would not be such a disaster. After all despite his fiery rhetoric, he has never shirked paying creditors, and with oil prices well above $100 a barrel he can well afford to do so. Moreover many reckon he will has been weakened by cancer and a recurrence of his illness will weaken his leadership.According to Greg Saichin, head of emerging debt at Pioneer Investments

Two things are important in Venezuela — oil prices and the ability of PDVSA to continue bankrolling the Bolivarian revolution. That’s intact and that’s why we think Venezuela still offers good value for money.

Saichin adds:

Even if Chavez is re elected, his position will be weakened. We feel Chavismo has created somewhat of a personality cult and should he relinquish the presidency or die in office as a result of his ill health, his successor will have difficulty in keeping up this ideology. After Chavismo, we suspect that Venezuela may move back to more centrist politics.

There is another scenario however — that of post-election violence in a country awash with guns. That is making some investors cautious, especially after three opposition activists were shot dead last weekend. Stuart Culverhouse, head of research at brokerage Exotix, has been bullish on Venezuela but told clients a week back to scale back on Venezuelan risk, downgrading his recommendation on the bonds to Hold from the previous Buy:

 A close election result might mean that you get an increase in tail risk event. If there is a challenge to the result and unrest there will be downside to bond prices

But any post-election dip may provide another chance to load up on newly-cheap Venezuelan bonds, Culverhouse acknowledges. Whoever wins the election, the real winners may be holders of the bonds with 10-percent-plus yields.

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