Investors casting their eyes over the globe for the next big opportunity tend to see in Latin America one of two scenarios: vast opportunities or huge obstacles. For the past few years obstacles have dominated the investment outlook for the region; among the most pressing concerns are the economic and political problems afflicting Argentina and Venezuela.
Yet if a discussion among Latin American finance executives at the 4th Latin American Regional Alumni Meeting in Miami is any indication, some investors are beginning to sense opportunity in Latin America. Rising stock markets, strengthening currencies and, perhaps most important, the first glimmers of activity in the U.S. mergers and acquisitions business, are seen as early clues that Latin America will present more investment opportunities than obstacles over the next year or two. And if investment in Latin America picks up as these experts are predicting, then investments by Latin Americans could present money managers with enormous opportunities for growth.
Certainly there has been little to attract investors to the region over the past few years. While world economic growth stood at about 3% in 2002 and is likely to be close to that this year as well – the result of an extraordinarily slow global economic recovery – Latin America experienced negative growth last year, the worst in 20 years.
Foreign direct investment in Latin America fell 33% in 2002 to $56.7 billion from $84 billion, the third consecutive annual decline. The reasons, according to Jerry Haar, director of the Inter-American Business and Labor Program at the University of Miami’s North-South Program, included the steep decline in the share prices of many multinational companies, the recession that slowed U.S. demand for imports, a drop in the number of publicly-owned companies available for privatization and increasing risk aversion created by crises in Argentina, Uruguay and Venezuela.
So far, the picture is marginally brighter this year. Forecasts call for 1.5% growth on average throughout Latin America and 3% growth in Brazil, Mexico and Chile. And if the results of Argentina and Venezuela are stripped out of the equation, then the region looks better than the world overall. Furthermore, an increasing sense of stability there is leading U.S.-based private equity funds, including J.P. Morgan Partners Latin American Fund, HSBC Holdings and Southern Cross Corp., to test the waters in search of acquisition or investment targets, Haar said.
Stormy Byorum, chief executive officer of Cori Investment Advisors, a private equity advisory and investment banking firm with an emphasis on the Americas, said the tremendous decline in the amount of investment capital flowing into the region over the past few years has created an acute shortage of capital among Latin American businesses that now want to expand. At the same time, there is an increasing sense of comfort among Latin American investors, signaled by rising stock markets and strengthening currencies in many Latin American nations. Finally, the ability of several Latin American companies to make initial stock offerings suggests to private equity investors, domestic and foreign, that they will have viable exit opportunities and need not worry so much about being stuck holding illiquid investments.
Byorum said private equity investors willing to become deeply involved in corporate operations can shop among a variety of quality assets at distressed prices. In many cases, she noted, there’s an added bonus: local managements have struggled for so long with a shortage of capital that they have become very disciplined and efficient.
M&A activity in Latin America should increase for the same reasons, with an additional impetus coming from the U.S., where Byorum pointed to a rising number of hostile takeovers, buyers willing to pay higher premiums and a tendency for the stocks of acquirers to rise, not fall. All of those are indications that boards of directors, beaten down by the drumbeat of accounting scandals that swept the U.S. in the past two years, are once again becoming more courageous, she added.
Julio A. de Quesada, senior managing director of Banco Nacional de Mexico’s Corporate and Investment Bank, said Mexico is representative of both the opportunities as well as the obstacles that investors face. With the world’s ninth largest economy, Mexico has transformed itself in the past decade from a closed economy heavily dependent on oil to one much more closely integrated with the United States. Indeed, de Quesada suggested that anyone looking to predict Mexico’s short-term economic performance need only look to the U.S. manufacturing economy. Mexico tends to lag that performance by about three months. Mexican companies are also becoming a more potent force internationally and regionally. Not only are Mexican companies acquiring other companies in Latin America, some of them – notably Cemex – have bought U.S. assets.
With disciplined fiscal and monetary policies and an independent central bank very much focused on inflation, de Quesada added, Mexico “has decoupled itself from the emerging markets.”
Nevertheless, Mexico remains a nascent democracy with a lot of learn, he added. Vicente Fox may be honest, open and transparent, but he also is politically naïve. Couple that with an opposition party that only knows how to say “no,” and many important reform measures – fiscal, labor, energy and bureaucracy – remain stalled. Mexico needs a better local market – banks are slow to lend to consumers and small and mid-sized businesses – as well as infrastructure investments. And there is still far too much paperwork and the government is too susceptible to corruption, de Quesada said.
At the same time that investors are sensing the first stirrings of opportunities to invest in Latin America, money managers should be sensing the opportunity to guide Latin Americans in their own investments. According to Haar, Latin America is the world’s most prolific producer of high net worth individuals and now has 300,000 people with $1 million or more of investable assets. The region is producing millionaires at a rate five times that of the U.S. or Europe. As a group, Latin America’s high net worth individuals represent about 3% of the world’s total, but hold 13% of that group’s wealth.
But the new Latin America investor is different from his or her parents, Haar said. The traditional investment preferences among Latin Americans were for U.S. dollar fixed income products and real estate. Relationships, brand names and image were the determinants of where they put their money. Today younger investors – even the 30% of Latin American high net worth individuals who inherited their money – are looking much more for diversity and performance rather than stability and relationships. Commodities, once unheard of as an investment tool among Latin Americans, are now being discussed at length.
Still, Latin Americans remain uneasily aware of the problems that occasionally deal harsh blows to one or another national economy, Haar suggested. Thus while they are willing to be more adventurous in their investing, they also need and want sophisticated advice about how to protect their assets. Wealth managers with expertise in real estate, estate planning and business planning will find themselves in high demand, he said.