Sunrise Over El Dorado : Alianza : December 11th 2018

DAILY THOUGHT : As the clock ticks down to the end of 2018 we have the annual circus over the minimum salary increase, yesterday was the start and we are once again looking at a starting spread of 3.8%-10%, the latter of course being the unions. Without wishing to add credence to FinMin Carrasquilla's past assertion that the salary is too high (no one reading this would get close to living on USD250 per month) the system is broken when 19-20% of the population receive less than that which means effectively there is no minimum wage - much of this has been caused by Minimum Wage workers being driven underground as employers struggle to pay the benefits. The point here is not the wage....but a system that needs an overhaul.

MARKETS

There is no getting away from the fact that yesterday was a poor day in terms of performance (-0.39%) and especially volume (USD18mn) - that is the sort of session normally reserved for the Friday before a long weekend, not the first day of the week. For the record the top volumes were reserved for arbitrage favourites Ecopetrol (USD6mn) & Bancolombia (USD5mn), in terms of performance the headline was Avianca which dropped 7.62% (see below). The index closed at 1377. The Peso weakened considerably on the negative oil print closing 1.4% lower at 3191 its high of the day having traded only USD770mn - this will be the way of it for the balance of 2019, a currency tossed around by the oil price.

The bond market is having a decent December thus far and again yesterday saw valuations along the curve with the 2024 dropping 1bp to 6.24% and the 2032 moving a similar amount to close at 7.27%.

TAX REFORM

For those of you bored to the back teeth by this subject I have good news - little to no developments yesterday as we await the Congress spit-balling session this week - the beer swillers and full fat fizzys brigade continue to give voice to their concerns, health not being one of them, and that is where I expect battle to be joined this week.

AVIANCA

A rough session for the airline yesterday after its post United deal bounce last week - the root cause appears to be the announcement on their proposed re-scheduling/cancelling of deliveries of Airbus 320 NEO planes and whilst this has been discussed and circulated previously the Reuters report appears to have hit the stock. In short back in 2015 they ordered 100 planes to match their ambitious expansion plans at an anticipated outlay of over USD10bn - it was quite the headlines threes ago however events have somewhat overtaken them, the economy hasn't perhaps done as well as expected, there is increasing competition and of course the pilots strike whilst well in the rear view mirror had a serious impact on their domestic business. Additionally now presumably with alliances with COPA and United, as well as an increasing number of code shares around the world they simply don't need all these planes so the strategy looks sound enough especially as the overseas routes yield far better than the domestic business where prices have been driven down by Viva which has acted as a positive disruptor in the space. But here is the rub, this is not a case of going to the bike shop and cancelling your son's Christmas order - for Airbus this was a serious piece of business and Avianca is in their hands to a large extent, clearly Airbus won't want to lose such a serious client but when there are USD billions at stake there are potential penalties and it may well depend on whether Airbus can find a new home for those planes - it is feasible but depends on many factors. Even delaying deliveries usually comes at a cost as the price will increase according to the length of the delay. They may well be able to negotiate their way out of this delivery squeeze but for now there is a lot of uncertainly and too many headlines around for some investors, some are suggesting that Brazil is not an issue as there is no direct relationship and there may be an entry point coming up. It is cheap for sure however to try and fully ignore Brazil is impossible because these 'back of the mind' stories tend to niggle away at investors much more than we would like to admit.