Colombia

Colombia has fallen from grace in terms of its healthy macroeconomic fundamentals, business-friendly government policies, and conservative fiscal stances. The economy is experiencing stagflation, public finances are deteriorating rapidly, and political uncertainty will persist. Underweight Colombia across all financial markets relative to their EM benchmarks, and short Colombian bank stocks and the currency versus their Chilean counterparts.

Despite higher oil prices, Colombian risk assets will underperform their EM peers in the months ahead. The domestic economy is evolving from stagflation into recession, and fiscal and political risks will raise the risk premium of Colombian assets. Take profits on the yield curve inversion trade and stay short COP vs. USD.

Colombian assets are inexpensive, but they are cheap for a reason. The economy is entering a growth recession while inflation will remain sticky and above target. Further, President Gustavo Petro’s policies will lead to lower investment, rising political volatility, and public debt deterioration. Continue underweighting Colombia across all asset classes.