By Rodrigo Campos

NEW YORK, Apr 8 (Reuters) – When a left-wing populist and a far-right lawmaker came to power in Latin America’s two largest economies, investors believed they knew where the money was going to be.

But after more than two years and a costly pandemic, disillusioned investors are now busy with how to move from a Brazil that once promised convincing reforms and privatizations to a Mexico that is expected to benefit from the United States’ economic recovery.

Investor concerns that Mexican President Andrés Manuel López Obrador would overspend to appease the rank and file that gave him a landslide victory in 2018 have yet to materialize, and neither have President Jair Bolsonaro’s promises to optimize the Brazilian economy.

López Obrador “is ‘less bad’ than investors expected, and the Bolsonaro government has been ‘less good’ than investors expected,” said Marshall Stocker, a portfolio manager at Eaton Vance in Boston.

While the way they cope with the COVID-19 pandemic seems at times to be in tune, with a mix of denial and mistrust in science, their financial responses have been starkly different.

Bolsonaro spent 8.6% more of Gross Domestic Product on the response to the virus, while López Obrador used just 0.6% more of GDP, according to data from the International Monetary Fund.

“The reading of the glass half full is that Mexico did not undertake any of the aggressive fiscal relaxation policies of its neighbors,” said Patrick Esteruelas, head of research at Emso Asset Management in New York.

This, coupled with the hope that a $ 1.9 trillion economic recovery package signed by US President Joe Biden will fuel strong growth in the North, is spurring a reversal of investor bias.

Although both countries suffered outflows of foreign investors in February, Mexican stocks and bonds attracted $ 355 million in the first three weeks of March, compared to Brazil’s outflows of $ 465 million, according to data from the Institute of International Finance.

The IMF this week raised Mexico’s GDP outlook for 2021 by 0.7 percentage points to 5.0%, while it raised Brazil’s 0.1 percentage point to 3.7%.

The shift in favor of Mexico has been supported by the COVID-19 situation in Brazil, where deaths are expected to soon surpass the worst of a record wave in the United States in January.

Brazil has so far reported more than 13 million infections and over 336,000 deaths, while Mexico has recorded more than 2.2 million cases and around 205,000 deaths, according to a Reuters tally.

Bolsonaro asked the armed forces this week if they had troops available to control possible unrest stemming from the COVID-19 crisis.

“Bolsonaro has lost the support of a large part of the business community, the bulk of the population and part of the military leadership,” Elizabeth Johnson, managing director of Brazil research at TS Lombard, said in a note.

Infighting over the budget has soured relations between the executive and Congress, he added.

A FRAGILE BRAZIL Bolsonaro surprised investors in February when he fired the head of state oil company Petrobras after a dispute over rising fuel prices.

Last month, the CEO of Banco do Brasil, the largest state-controlled bank, resigned after a dispute with Bolsonaro over branch closures.

Brazil’s financial markets have not fully recovered from the sales caused by the changes.

The real has lost more than 7% this year against the dollar, compared to a drop of around 1% in the peso. If the greenback were to strengthen further, the effect of a weaker currency would benefit the more export-oriented Mexico compared to Brazil, where a weaker real would especially increase price pressures.

Fiscal imbalances also make Brazil more exposed to rising US Treasury yields, at a time when benchmark local bond returns are flirting with the highs of a year ago.

The prospect of former leftist president Luiz Inácio Lula da Silva running as a candidate against Bolsonaro next year is also increasing pressure on Bolsonaro to boost social spending, and diminishing the odds of legislative reforms.

Administrative and fiscal reforms are less likely to pass soon, but “even if they get any of these reforms, they would be very diluted with a long overdue fiscal adjustment,” said Gordon Bowers, an analyst on the emerging markets debt team at Columbia Threadneedle.

According to some investors, an oversold Brazil could offer opportunities to value hunters.

“Brazil’s politics is messy and its communication is poor, but the rules still work and the government can keep control of the road,” said Ricardo Adrogue, head of global sovereign debt and foreign exchange at Barings. “There is a budget to increase social protection and the deficit will not be explosive.”

“The rest is just noise,” he added, “and maybe a great investment opportunity.”

(Reporting by Rodrigo Campos, Additional Reporting by Karin Strohecker, Edited in Spanish by Javier López de Lérida)

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