Investing In Latin America: Commodities, Consumption And China

Feb 22 2011 | 9:56am ET

The biggest country in Latin America is the biggest investment story in the region, for now. But savvy investors and top LatAm experts are casting a wider net, focusing on other, long-term domestic growth factors and macroeconomic forces that could impact the region for decades to come.

“Brazil is the engine that really drives the Latin American investment environment,” said Fernando Donayre, founder and chief investment officer of INCA Investments, which manages a $400 million Latin American-focused hedge fund. But while Brazil may be the country driving growth—according to Morgan Stanley’s investable market indices, Brazil holds two-thirds of the investment opportunities in Latin America—it is the two ‘C’s, commodities and consumption, that Donayre and other top fund managers who spoke at last week’s FINforums event in Miami are banking on.
“Consumption is going to be the most important driver of Latin American economies,” said Donayre, who gave the opening address at The Search For Alpha In Latin America, which brought together over 90 finance professionals to discuss the challenges and opportunities of investing in the region. Experts agreed that rising consumer spending, coupled with low inflation and a young population is creating the perfect environment for robust growth.

“We have [the] demographics, and that is a very powerful force,” said Donayre, who hails from Peru but runs his fund out of Miami. “That is why you see the multinationals going down there…consumption is a very powerful long-term story.”

Julie Neitzel, president of GenSpring Family Offices in Miami, concurred. “The key to growth in this region is consumption…Brazil is a country of about 190 million people, and out of those 190 million about 50 million of them are middle class. They are youthful consumers, they are getting older and they are going to be buying more,” said Neitzel.

On the flip side, Donayre and his colleagues at INCA are concerned that household consumption debt it too high, especially in some countries.

“The Brazilian consumer pays a higher percentage of household income to debt servicing than the American consumer,” said Donayre, explaining that even though Brazilian households on average have less debt than American households, they are paying much high interest rates, which could be a problem down the road.

“If you want a car you better be prepared to pay 30% in interest,” said Donayre. “But they don’t look at it this way. They say, ‘hey, if I need a car and I can afford the monthly payment and it is going to get me to my job or it is going to give me a sense of convenience that I’ve never had before, well, if I can afford to make that monthly payment I’m really not paying attention to that high interest rate.’”

Transparency And The Rule Of Law

As a native of Peru, Donayre has lived and worked all across the region. Perhaps it is his firsthand knowledge of the rule or law and the level of transparency each country possesses that gives him peace of mind when making investment decisions. But investors from the United States are noticeably absent from the large pools of capital flowing into the region (Brazilians themselves are pouring money into LatAm markets, as are the Chinese), and participants in the forum discussed why.

“There are mental barriers for Wall Street when it comes to investing in Latin America,” explained David Brillembourg, founder and chief executive officer of the Brilla Group, which invests in high-end beachfront resorts  in Latin America and the Caribbean. “People wonder, ‘is my money is safe’ and ‘what kinds of controls are in place?’”

But Brillembourg is optimistic that the Americans will catch on. “As markets like India and China get overheated, there is going to be a tendency to come toward an easier market. It is the same time zone, we have the same culture…we are already seeing it with some of the bigger pension funds here in the States. They are looking at ways to get into markets like Colombia and Peru.”

Experts agree that Chile has by far the most transparent business culture in the region. Not only does it have laws to protect shareholders, it enforces those laws and it has done a good job of getting its own financial house in order. But Neitzel says while this is all fine and good, it doesn’t add up to big opportunities for investors.

“Chile is a very well managed economy…they’ve done a great job building surpluses from their copper proceeds, so they have done many things well,” said Neitzel, “but this is a country of only 16 million people.”

Brazil, on the other hand, has a middle class over three times that large, but while the legal environment there has improved in recent years, fund managers have varied opinions as to just how effective the law is when it comes to doing business there. Donayre, for example, would like to see more progress with shareholder rights. Others such as New York-Based Compass Group’s Antonio Miranda have had positive experiences when dealing with the Comissão de Valores Mobiliários (CVM)—the Brazilian version of the Securities and Exchange Commission.

“In Brazil, if you follow the letter of the law and understand your rights, we have found that CVM is a great partner and enforcer of those rights,” said Miranda.

Meanwhile, “Peru is a place we need to see better rules, the rules are not in place,” added Miranda. “Colombia, on the other hand, has the rules but does not enforce them.”

The China Factor

China and commodities go hand in hand, and a slowdown in China would inevitably wreak havoc on LatAm exports, specifically Brazilian ones. Speakers agreed that bad news for China would mean bad news for Brazil, which is why they aren’t putting all their eggs in that basket.

“Brazil is obviously one of the countries that is heavily exposed to China and is going to be very sensitive to the commodity play if China does experience a recession,” said Jason Molesworth, co-founder and chief operating officer of Miami-based hedge fund Simplified Asset Management.

“China is now Brazil’s largest trading partner, and there is a tremendous amount of dependence on the Chinese economy,” said Rainford Knight, a partner of the Florida Institute of Finance.

“If there is a dramatic slowdown [in China]…then that’s a problem,” said Ray Zucaro, a principal at SW Asset Management, a California-based asset management firm that invests globally.

The China factor is exactly why fund managers are looking so closely at domestic consumption and the growth story of each individual country before mapping out their investment strategy. And while Peru and Colombia may be a small slice of the Latin American pie, don’t be surprised if the smart money is finding that small slice to be very sweet.

Opening Keynote: The Search For Alpha In Latin America (VIDEO)

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