Key Takeaways on Venezuela

As long-term investors, we do not react to every passing headline, but this weekend’s developments merit commentary against the current capital market backdrop. As always, our focus remains apolitical and limited to potential market outcomes. We also want to acknowledge the human element as Venezuelan citizens face a transition that can impact their everyday lives.

Our initial perspective is that this weekend’s developments are likely to have limited immediate macro implications but do underscore several themes we have discussed in recent Weekly Fives.

Currency fluctuations will likely continue in the New Year, and despite remaining in a defined upturn against major global peers since the 2008-09 Financial Crisis, the dollar’s recent weakness could continue. While the dollar has long acted, alongside the Swiss Franc and the Japanese Yen, as a “safe harbor” currency during periods of market stress, U.S. actions in Venezuela, the Supreme Court’s pending trade law ruling, and other geopolitical developments with the United States playing a major role may continue to put pressure on the dollar. Currency markets are complex and, over time, economic theories such as purchasing power parity and interest rate parity suggest that countries’ exchange rates revert to fundamental levels. In the very near term, however, the dollar may show some ongoing weakening momentum. This could benefit exporters and domestic producers but increase costs for U.S. consumers looking to purchase goods abroad. 

The most obvious implications are for physical commodities, namely hydrocarbons. Venezuela was at one point the world’s largest oil exporter, exceeding crude output from Saudi Arabia. However, sanctions, weakened infrastructure, and internal strife leaves Venezuela with the world’s largest proven oil reserves yet, ranking outside of the top 20 global oil exporters in the last two years. The immediate market reaction has been a drop in both natural gas and crude prices, with more acute natural gas movement. Energy markets appear to recognize the significant “value unlock” potential across products, and lower energy costs act like a tax cut for consumers and businesses alike. 

Headlines will likely persist, but we see limited immediate investment implications. Markets tend to quickly and more broadly discount events that could immediately alter consumer or corporate behavior, and thus far we see investors centering on currencies, natural resources, and select equity sectors. Geopolitics may shape trade dynamics and, eventually, how global investors view dollar-denominated assets; as we have noted, we remain focused on how the bond market digests central bank policy and trade dynamics, especially for government bonds. As always, we encourage clients to remain focused on their long-term goals amid short-term disruptions and volatility.