Hugo Chavez, President of Venezuela, died on Tuesday, March 5. He was a polarizing figure, staunchly anti-American, a socialist hero, and leader of international renown. His death marks the end of an era: Chavez had been president since 1999. Although criticized by some for concentrating power in the executive branch, he was also responsible for directing the country's petroleum-based wealth into social programs: education, food, and health care. Opponents said that his policies were unsustainable, inflationary, and decreased farmland. In addition, he infringed on the freedom of the press, forcing dissenting broadcasters to get off the air waves. His Vice President, Nicolás Maduro, Chavez's designated successor will rule in the interim until new elections.
While the end of the Chavez era MAY signal change for Venezuela, it should be noted that in the 2012 election, Chavez won with 22 of the 24 Venezuelan states, and 55% of the popular vote. While Chavez did have a "Cult of Personality," the imminent election to find a replacement, constitutionally mandated to take place within 30 days, will likely be won by a member of Chavez's own United Socialist Party of Venezuela. This means that it is unlikely that any major policy shifts will take place in the short term, despite one of the most staunchly anti-capitalists no longer holding office.
Scope in Financial Markets
There are a few paths for investors to play this geopolitical event. Barclays (BCS) correctly identified Venezuelan bonds as an outperformer in emerging market debt during Chavez's bout of illness and cancer surgery in December of 2012. This new development in Venezuelan governance could have a similar impact on bonds. As the announcement went out, the fixed-income markets did not seem to have a strong reaction either way, with a little changed yield of 8.98% on its bonds due in 2027. If one were to expect a market reaction similar to the one in December, the average American Investor would look to an ETF for exposure. Unfortunately, given the anti-market mentality of the Chavez Regime, it is not unsurprising that no direct Venezuelan equity or bond ETF exists. The ways for investors to play the bond market comes in the iShares Emerging Markets High Yield Bond Fund (EMHY), the Market Vectors Emerging Markets High Yield Bond ETF (HYEM), and the Market Vectors LatAm Aggregate Bond ETF (BONO). EMHY has the highest exposure to Venezuelan debt, comprising 12.4% of the portfolio. BONO and HYEM have weightings of 7.9% and 7.4% respectively.
Expected Changes in Energy Markets
Given Venezuela's massive 297.6 billion barrel oil reserves (according to OPEC) or 209.4 billion barrels (according to the CIA World Fact Book) (the 2nd highest in the world), political developments in the country are closely watched by energy market participants worldwide. Although energy markets might react with higher prices in the short term based on uncertainty, (potential plays being the United States Oil Fund LP (USO), Energy Select Sector SPDR ETF (XLE), Exxon Mobil (XOM), BP (BP), and Chevron (CVX)) it seems unlikely that any major changes in world production are imminent. Venezuela remains a member of OPEC, so production will be subject to international controls, even with a more market friendly or production enthusiast successor. Unless broad reaching changes are made during the next Venezuelan election, Chavez's passing should not be a significant force in energy markets during the medium term.