Investment Adventures in Emerging Markets

Latin America: Leadership in Chile and Brazil

In Chile

Latin America is set to witness eight elections this year, including four presidential elections in Chile, Costa Rica, Colombia, and Brazil. We recently traveled to the region to research investment opportunities there and to get a sense of the ‘mood on the ground’. We came away with a general impression of optimism, particularly in Brazil, and we think this will spread to other countries in Latin America.

We had visited Santiago, Chile, and so I was shocked and saddened to hear of the impact of the powerful earthquake that hit central Chile shortly after I left. I have an apartment in Chile and although the building was not destroyed and is structurally sound, cracks formed in various parts of the unit. Since copper and other minerals are Chile’s major exports, it was important to learn that the mining industry in the north of the country was not impacted by the earthquake.

The swift response by the Chilean government as well as international aid agencies to provide assistance is reassuring, but there is much that still needs to be done. We must accept that earthquakes, volcanic eruptions and other natural phenomena have been with us in the past and will continue in the future. Chile, too, has experienced such events and has been able to recover and prosper. We believe this will be the case this time as well.

Chile is a leader among Latin American countries in terms of its management of the economy, its encouragement of investment both local and foreign, and its stable policies. In mid-January, Chile elected Harvard University-educated economist Sebastian Pinera as head of state – the first conservative, elected president of Chile in over 50 years. The new government stepped into office on March 11. As noted, we believe Chile’s previous government managed their economy very well and we would look forward to a continuation of the current economic policies. We would also encourage the new government to further support small and entrepreneurial businesses, which could likely help the economy as well as capital markets. On a broad basis, we think that the new government may even augment new investment opportunities in Chile.

When we arrived in Brazil, the summer air was thick with humidity, and the traffic from the airport underscored the countries rapid economic expansion and optimism. I had always enjoyed the annual Carnival in Rio de Janeiro, which reflects the culture of a people who seem to embrace everything with great passion. Brazil’s presidential elections are scheduled for October of this year. From our conversations with individuals and companies, expectations are that the new government’s policies should be ‘more of the same’. Most people believe that the new president should not change policies that are going well in the country. We concur. Looking back, we were all pleasantly surprised by President Lula – contrary to expectations before he took office, President Lula cut government expenses in January 2003, helping trim the deficit from 4.2% of gross domestic product (GDP) in 2002 to 2.4% of GDP by 2004.[1] He has held the deficit under 4% of GDP every year since then, helping the country earn investment-grade credit ratings from Standard & Poor’s and Moody’s Investors Service.[2] As he nears the end of his term, I would consider awarding this president high scores for the way he has steered the country and its economy. In my opinion, he has been a wise visionary, with his emphasis on education and homes for low-income individuals, and if these continue to be emphasized, we believe it will be very positive for Brazil.

We would be concerned if the government were to impose restrictions on business growth, elevate taxes or restrict licenses. However we have not seen this happening, which is good news to us. We also think that the government’s idea of creating “national champions”, domestically-owned companies who are top in their respective industry, is good. The government, wisely, is not just looking at Brazil but also at the global environment, and it sees that this country needs strong companies that can compete on a global scale. The biggest energy company in Brazil currently ranks as one of the top 10 largest corporations worldwide. Many of these “national champions” were former state-owned enterprises, which had since been privatized.

We think that Brazil is the largest investable market in Latin America. It is a strong commodity producer and exporter, and it is likely to benefit from rising global demand for energy, metals and other commodities. With its tremendous resources, not only mineral but agricultural as well, Brazil’s economy is less dependant on external forces than, for example, China’s, because Brazil has to import very little of the resources identified above.

Historically, political change and financial markets in Latin America have had a rocky relationship. But the region has progressed significantly since a decade ago, with better regulatory systems, higher foreign reserves and robust economic growth in many countries. This year, we expect to see Latin American markets continuing their secular bull trend, though of course, there may be corrections along the way.

[1] Source: EIU, as of Feb 2010

[2] Source: EIU, as of September 2009

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