Chile’s domestic consumption will fuel future growth, says BCI

Transcript

The mutual fund industry in Chile now represents approximately 20 percent of its GDP, illustrating the country’s potential for investment. But is this growth set to continue in the coming 12 months? Rene Peragallo, Head of Institutional Equity Funds with BCI Asset Management, discusses the current situation in Latin America, and how the country’s future growth will be fuelled by domestic consumption.

World Finance: The mutual fund industry in Chile now represents approximately 20 percent of its GDP, illustrating the country’s evolution in the sector and potential for investment in the country. But is this growth set to continue in the coming 12 months? Joining me down the line to discuss is Rene Peragallo.

Will Rene, let’s start with Latin America. What’s the current situation in local markets and the economy?

Rene Peragallo: The economic situation in Latin America is quite challenging right now. The region as a whole is not growing. The fall in the commodity prices and the slowdown in China are affecting our terms of trade, and are putting pressure on fiscal balances.

It’s going to be a long recovery process. But having said that, you should consider some differences among countries; and I personally think that investors are not.

Brazil is not Latin America. It’s the biggest and most important country, but there is a huge political and economic crisis over there. You have a GDP contraction of 3.5 percent this year. On the other hand, you have in the region countries such as Chile, Peru, Colombia and Mexico. They are still growing – at low, single digit rates, but they are growing.

So you have a different context. And the authorities are taking actions to put these economies back on track.

World Finance: Looking at Chile a little bit closer now, and how has it performed over the last 12 months?

Rene Peragallo: Well, the performance of the local stock market is bad this year. The main index is around eight to nine percent down in local currency, and more than 20 percent in dollar terms.

And probably that doesn’t make sense if you compare the performance of the Chilean index with the performance of the Brazilian index. They are showing the same return in local currency, and from our perspective that shouldn’t happen.

World Finance: Where are the opportunities, would you say? And what trends do you forecast in the coming year?

Rene Peragallo: Now we are analysing all the Latin American region, we see many opportunities. Especially in Chile, where the stock market is more than 50 percent down from its peak in 2010.

The economy is growing at a low rate – around two percent – and we used to grow more than five percent during the previous years. So we think that two percent is pretty decent, even in this context. And we believe that the economy will continue growing at a low pace. We’re trying to avoid the commodity exposure, and we are trying to put our focus on domestic consumption, healthcare, utilities, and banks.

I think these services will drive the recovery of the stock market in the next years.

World Finance: And the small cap Chilean investment strategy? Talk me through this.

We think that the small cap companies can over-perform the market in the next three years. We adopted a very fundamental strategy. We hired six analysts to analyse the local market. And from that perspective we see that these companies, which now are trading with a high discount over the stock market, can perform really well in the next three to five years.

This approach is a long-term approach, and we are focusing to bring AUMs from pension funds and other institutional investors in Chile and Latin America.

World Finance: So when it comes to new investments and strategies, what do you focus on?

Rene Peragallo: I would say that we basically focus on consistency with our investment process. We look for strategies we think we can develop in a competitive way. So we start analysing our capabilities, and which one we need to enhance.

We also look for strategies that can complement our clients’ asset allocation. So we are always studying their portfolios, trying to match what they are doing with what we can develop in a competitive way, and from a long-term perspective.

We’re bringing talents to our investment teams – not only in the research area, but also we’re bringing PMs with excellent track records, and exclusively dedicated to our LatAm strategies.

World Finance: How do you go about developing institutional market strategies?

Rene Peragallo: We have two different models. We have our own funds, and I’m in charge of developing the equity strategies for institutional clients. And we also are looking for partnerships with global investment funds and global asset managers.

And we also are enhancing our capabilities in all the alternative funds. We want to go and to improve our capabilities in those asset classes that are very appealing right now, because they can offer our clients a more diversified asset class exposure and better returns.

World Finance: Finally, how do you see the current political climate in the region impacting the future of the equity market?

Rene Peragallo: There is a big change here. In December the opposition in Venezuela won the national assembly, so now they’re going to rule the congress. Argentina, two weeks ago we had a new government – the opposition won the election – and they can make a big, big difference for the next years.

And we are going to see what’s going to happen in Brazil. You know this impeachment situation… the government is in a crisis, they have less approval than the inflation rate. And that means that in the future we believe that there’s going to be a more rational approach to the private sector, and you will see less intervention in the markets. And that’s good, because the environment for the investor is going to be better than in the past.