Latin American investors are facing unusual challenges in 2018. As the months go on, they will need to find quality assets in an environment where central banks have repeatedly slashed interest rates to spur economic activity. Furthermore, they will also have to navigate a dynamic political landscape, with general elections already held in Chile at the end of 2017, followed by Colombia, Mexico and Brazil during 2018.
The main focus for the region is Brazil. At the beginning of 2018, interest rates had reached a historic low of 6.75 percent (see Fig 1) and, according to the main macroeconomic research firms, may move even lower throughout the year. Against this backdrop, high-net-worth individuals, who used to benefit from double-digit returns provided by traditional fixed-income instruments, now need to explore a new set of asset classes.
Back in fashion
After years of fixed-income products dominating the Brazilian landscape, investors are starting to consider assets that were historically less favoured, such as publicly listed equities, private equity funds, credit products, real estate and hedge funds. With rates likely to stay low for a while and capital market activity continuing apace, we expect strong demand for these new asset classes in 2018. Activity in both equity and debt capital markets is also likely to remain high. Moreover, given potential changes to tax treatment for individuals, it is likely that there will be increased interest in investing into private pension funds.
In addition, investments in markets outside Brazil are likely to become a more attractive diversification strategy, driven partly by a reduced interest rate gap. Assets denominated in other currencies will be more attractive as natural economic barriers come down, and high-net-worth clients become more aware of the need to diversify their investments geographically.
Chile represents another interesting market, in which the unveiling of the next government’s agenda will create fresh opportunities for investors. In addition to political changes, the Central Bank of Chile has driven interest rates to their lowest level since late 2010, sparking a renewed appetite for riskier assets.
Wealth managers will differentiate themselves through their ability to provide solutions for clients seeking for clients seeking to diversify their investments across asset classes
After several years of lacklustre economic performance, 2017 was a strong year for the Chilean investment environment, with equity markets reaching a high point. Recent equity capital markets activity has led to an increase in the number of companies listed on the local stock exchange, which has created opportunities to generate alpha through active stock selection. We expect companies with a stronger local footprint to draw more attention, with investors favouring small and medium-sized listed companies over larger counterparts.
Local alternative investments will also create new and interesting ways of investing in Chilean markets. One example is the real estate sector, which is recovering after the recent downturn. Credit is another strategy that is picking up speed through direct lending and structured products.
The Colombian economy is still recovering from soft commodity prices and the impact of weak demand from Brazil. Inflation is finally falling, providing the opportunity for a looser interest rate policy. As in other countries in the region, Colombia’s central bank is finalising a cycle of interest rate cuts, which will push rates to levels comparable with those of late 2015. General elections will be held in May this year, against this backdrop of economic recovery.
Investment opportunities will move from interest rate bets into the domain of traditional stock picking and more sophisticated vehicles, such as real estate investment trusts. With respect to the latter, potential regulatory changes could lead to additional interest from non-Colombian investors.
Alongside investment allocation, as a result of recent reforms, high-net-worth clients will pay more attention to how best to rationalise their taxes, while continuing to diversify across asset classes and geographies.
In Argentina, economic improvement continues, but the challenge for Argentinian capital markets is to create local assets. Another important source of good news has been the ambitious government-sponsored reform agenda. Recent changes to tax and pension rules, combined with the overhaul of capital markets regulation, has paved the way for traditional asset classes denominated in the local currency. Recent economic reform aimed at reducing inflation and interest rates, together with Brazil’s recovery, is expected to stimulate local economic growth. Fixed rate bonds (both sovereign and provincial) and equities are the best ways to invest in Argentina’s turnaround, which we expect to evolve further in 2018.
The road ahead
In addition to the challenges derived from the onset of a new economic era, in recent years governments in the region have created new regulatory programmes for capital invested abroad by residents. This has raised the bar in terms of the quality of service and investment for a relevant portion of Latin American wealth.
The coming year has the potential to offer myriad investment opportunities in Latin America. The best wealth managers in the region will not only differentiate themselves through their quality of service, but also through their ability to provide comprehensive solutions for clients seeking to diversify their investments across asset classes.
As reformist agendas are favoured by governments throughout the region, it is crucial to understand regulatory changes. Setting up an efficient investment structure will also play an increasingly important role in generating long-term results. Ultimately, being a local player in the key Latin American economies with strong capabilities is a significant competitive advantage when advising clients in the year ahead.