Brazil turnaround will set Latin America on road to recovery
Rogerio Pessoa, BTG Pactual
With a new government in place, Brazil looks set to leave its economic woes behind, which bodes well for the region as a whole
There is light at the end of the tunnel for Latin American markets, more severely impacted by recent external shocks than any other emerging regions.
These included QE programmes in developed countries – which triggered portfolios’ shift towards financial assets in developed countries, while exerting a chilling effect on asset prices and currencies across emerging markets – plus the rising dollar and fall in price of commodities, on which the region is dependent.
But sentiment is changing and the region’s recovery will be mainly driven by its largest market. Emerging from a recession of 8 per cent over the past two years, Brazil in 2017 is expected to grow by 1 to 1.5 or 2 per cent next year, according to BTG Pactual and Itaú.
“We are cautiously optimistic that the worst is behind us in Brazil, in terms of economic downfall and political instability,” says Rogerio Pessoa, head of wealth management at BTG Pactual.
“This should help the Latin American economy to move forward, and generate new wealth,” he says.
“With a new economic team of very high calibre in place, we are seeing a lot of entrepreneur confidence coming back very quickly in Brazil, and also expect lower inflation.”
Brazil may have stopped deteriorating, but the speed of the country’s recovery will depend on structural reforms that the new government, if confirmed in August, will be able to implement. A final verdict on president Dilma Rousseff, on trial for breaking budget laws, could come at the end of August, after the end of the Rio Olympics.
The stabilisation in commodity prices, the general end of a populist political cycle in Brazil and Argentina and market friendly policies are also expected to contribute positively to the region’s economic growth.
These positive developments have also had a positive impact on flows to onshore investments.
6-9%
Latin America is expected to grow by 6 to 9 per cent in the coming years, according to Itaú’s forecasts.
“Between 2013 and 2015 especially, we saw Brazilians sending money abroad, because of political instability and devaluation of the currency, but today flows are coming back,” says Mr Pessoa. Investors are looking to take advantage of high real local interest rates – as nominal interest rate is at 14.25 per cent and inflation is at almost 9 per cent – and investors realise the devaluation of the currency has already reached high levels.
LatAm clients in general are still highly concentrated in fixed income markets, be they local or offshore. Although it still features in Brazilian investors’ portfolios, the appeal of US real estate has diminished, as prices have risen and local currency has devalued. “Investment opportunities in US real estate are not as obvious as they were four to five years back, when markets were depressed from the 2008 crisis,” states Mr Pessoa.
Interest in private equity, a hot asset class until two years ago, has also plateaued, while hedge funds have failed to deliver high returns over the past two to three years.
However, Mr Pessoa expects greater flows into emerging markets with high interest rates and better political and economic stories, such as Brazil, while developed countries continue to struggle with very low or negative real interest rates.
Wealth creation is expected to benefit from improved M&A activity, which was badly hit by the commodity crisis. Just recently, it has started to show some signs of recovery.
“We see a lot of foreign interest in Brazil, as assets have become cheaper and the economic outlook has improved,” says Mr Pessoa.
Other LatAm countries will also benefit from a similar trend, in particular Argentina, which experienced a dramatic turnaround in investors’ sentiment since a new centre-right government took power in December.
“There are not as many mergers and acquisitions as in past years, but we are very close to those liquidity events, that’s where the opportunity is to acquire new clients and increase AUM,” says Jose Ernesto Fuentes, head of wealth management for LatAm at Citi Private Bank, stressing the importance of offering clients open architecture, independent advice, a strong balance sheet to support wealthy families growth, as well as private equity and real estate solutions.
As a destination for investments, today Latin America offers the best investment proposition of any region in the world, believes Jan Dehn, head of Research at Ashmore.
“The case for investing in Latin America rests on the region’s resilience during the recent headwinds, the nascent cyclical upswing, a more benign external environment and genuinely attractive valuations of asset prices,” he says. Additionally, governance is improving in a number of highly influential countries in the region.
“Latin America is today the cheapest of all emerging markets.” This opportunity, however, will not last forever. “Investors should allocate now in order not to miss this once-in-a-decade opportunity,” he states.
