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LatAm's road to returns: fund buyers on their local market plays

A diverse group of Latin American investors tell Citywire Americas which markets they are targeting and whether opportunities in alternatives are in their sights.

RODOLFO CASTILLA

Citi International Personal Banking

Montevideo, Uruguay

Our global investment committee (GIC) has moved to an overweight in emerging markets over the past few months. For our business in the southern cone, 50 to 60% of our investments have been going to Latin America, where we are overweight both equities and fixed income, with more flows going into the latter.

We are investing in both hard and local currencies in Latin America, but we are more bullish on local currencies. Our GIC supports Brazil and Mexico, and in the Southern Cone we have been selling a lot of our allocation to Argentina, but that has been more for tax efficiency reasons as requested by our clients post-amnesty, rather than because of real fundamentals (which are still sound).

Among the funds we have been recommending are the Investec Latin American Corporate Debt fund and the MFS Meridian Emerging Market Debt fund. We have also sold individual bonds in Brazil and Argentina. These are the biggest allocations we have in the region. Our global unit would recommend less than a 10% allocation to these themes and now, discounting the Argentinian bonds, we are close to those figures for EMs and Latin America. That has been a significant move in our portfolios this year.

In Argentina we hold both sovereigns and corporates and we also like the provinces, so we are looking to find quality in that area. There are some good yields on offer. We have recently also been doing a lot of profittaking and moving away from some growth indices.

We don’t currently offer illiquid products to our retail clients on our platform, only liquid alternatives, which have seen defensive and protection inflows hit new highs in the past few months.

MARIA CAMACHO

Latam ConsultUS

Montevideo, Uruguay

The world is growing at a slower pace than what we have seen in previous economic cycles. The good news is that growth is now spread all around the world, which has a positive impact in emerging markets economies, particularly in Latin America. The high dependency on foreign economies makes this region more vulnerable to the stimulus of the rest of the world when it comes to delivering attractive returns.

Countries such as Brazil, Argentina and Peru are showing higher growth than expected, and they are our favorites when we add exposure to the region in our portfolios. Valuations are cheap and look even cheaper when you compare them to developed economies. In the case of Brazil, despite the political noise and corruption scandals, the economy is coming out of recession: industrial production is increasing, inflation is lowering and nominal rates are decreasing. History shows that when nominal rates decrease, investors begin to rotate from local fixed income into equities, and we feel this is just beginning.

Argentina has changed too, and we feel consumer and corporate confidence will increase after the elections later this month. There are new opportunities in the real economy, and a greater number of new fixed income issues and IPOs will be available in the market. Investors should be prepared; this is why we recommend having some cash available in portfolios until then.

Although it has higher political risk, Peru also shows strength. The approval of the expansionary plan in infrastructure will have a positive and real effect on the economy.

JUAN ANTONIO BARTESAGHI

Bartesaghi & Asociados

Montevideo, Uruguay

Since the Argentinian election of 2015, the country, among many changes, has made a U-turn in its political, economic, international relations with the investment community. With the new government, trust in the country has increased and money has started to flow back. Investment in the Argentinian peso has returned very high yields when measured in US dollars. Returns in Argentinian USD-denominated assets are very good too. We are only analyzing returns though; we are not considering adjusting returns to risk. But even if we do, Argentina is still a very good investment story. However, we should only do so carefully.

Since the beginning of the millennium Argentina has suffered from under-investment. The country needs to catch up with the rest of the region. As we know, infrastructure investment goes hand-in-hand with long-term funding. In order to receive the long-term funds the economy needs, the investment community has to see a political will to stick to the right economic path, regardless of which party is in power. Argentina needs to convince the world it will stick with this direction for the long term.

Argentina is the biggest story in Latin America. There are plenty of opportunities, but we always have to keep an eye on the political developments.

In the meantime, there are opportunities in boring economies for private equity investors. Many investment advisers are offering private equity opportunities in order to differentiate from their competitors. Some of them have a tax component, but it’s important to always consider our client’s objective first and foremost.

For me, diversification is one of the main reasons why clients prefer to invest in funds that don’t return as much as the local investments. When considering investing in private equity funds in our regions we have to think about this issue.

GABRIELA COHEN NOFAL

LarrainVial

Santiago, Chile

Since the beginning of the year, we have shifted our exposure from fixed income to equities given the tight spreads in credit. We prefer to be exposed to equities with a focus in emerging markets (Latin America and emerging Asia) and also in European equities. Specifically in Europe we see value in smaller companies given the higher beta in an improving scenario for the region and incoming flows. In our recommended portfolios we have a big portion in this asset class. In the fixed income universe we have a tactical allocation in emerging market sovereign debt in local currencies, in order to take advantage of the higher yield relative to developed markets and a scenario of falling rates in some emerging economies.

We have not seen interesting private equity or infrastructure opportunities investing in Latin American assets this year. However, we have seen attractive private equity opportunities in developed markets. For example, within our alternative investments portfolio, we have allocated capital to a private equity fund, which we selected because the general partner had a disciplined approach to acquisition price and can execute distressed opportunities should they arise. Current private equity multiples are approaching 2007 levels, so pricing discipline is definitely a concern for us in the current vintages. As for the ability to execute distressed opportunities and acquire companies through the debt portion, we see it as a hedge with respect to the equities’ cycle.

JORGE ANDRES CARDOZO

Ikalon Family Office

Bogotá, Colombia

Since last year, with the correction in the capital markets between January and February, opportunities have arisen, especially in alternative investments. Although we receive every kind of proposal, we have seen more infrastructure projects, not just in Colombia but also in Mexico. The macro picture supports it too; central banks are cutting interest rates, oil prices are steady and the Colombian peso is appreciating. The need for portfolio diversification away from traditional assets presents the perfect opportunity for alternative investments.

In Colombia, the Fourth Generation (4G) road development scheme has brought a wide range of opportunities. This expansion of investment supply has created space for lending in the private sector. Rather than simply finding long-term opportunities (between 10 and 15 years), there are now some shorter-term investments on offer.

On the other hand, in the private equity spectrum, we have seen more venture capital funds. One of the reasons is a lack of resources being unlocked by banks, creating opportunities for private sector investors, who are less affected by macro developments. Of course, these ideas are more niche strategies, ranging from technology to the healthcare services sector. The increased supply of private equity has not just been because of venture capital though, but is also thanks to the surge in mezzanine financing, particularly in the short-term loan market. However, it is important to recognize the lack of funds of funds in Colombia, a very important component when you start building a private equity model.

KAREN GARCIA

Sweetwater Securities

Panama City, Panama

The world is facing a lot of geopolitical risks and Latin America is no exception. However, we have seen that local economies have incorporated growth programs that have made their economies stronger and the region as a whole will come back to positive growth this year. Brazil has reached the end of its recession after showing a second consecutive quarter of growth, at 0.3% growth in Q2. Argentina is taking steps in the right direction too, and should start experiencing an economic boost that will favor investment in the country.

In terms of private equity we see better opportunities elsewhere but we always keep in mind that private equity plays are not liquid investments and are therefore not our preferred kind of asset. We see a solid rally in global equities, which have risen 15% so far this year and show no signs of disruption, while emerging market equities have returned 20% in the same period.

In terms of infrastructure projects we are investing in the construction of the second line of Panama’s metro system – an investment structured by UBS and with the same country rating as Panama itself (BBB). It has attracted not only international investors but also a lot of local investors seeking good returns in infrastructure projects.

We are also backing a project in Costa Rica called Autopistas del Sol, a highway project that is already in place and managed by a large and experienced Spanish company. We believe there are many opportunities in infrastructure in the region, as many countries need to improve their internal infrastructure in order to become more competitive. Many governments have already committed to this idea.

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