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Governments in the Mercado Integrado Latinoamericano (MILA) region have provided a unique and welcoming regulatory framework for investment. Coupled with the increasing opportunities and steady growth channels across the region, investors seem to be heading there in droves. World Finance spoke with Alejandro Perez-Reyes Zarak, Head of Asset Management at Credicorp Capital, about what makes the region so unique.
Why do you think the MILA region presents good opportunities compared with other emerging markets?
The region benefits from macroeconomic stability, which has resulted in a succession of credit rating upgrades over the last decade. Colombia, Chile and Peru enjoy high levels of international reserves as a percentage of their GDPs (their average level in 2013 was 19.3 percent), which are sufficient to cover their current account deficits and smooth imbalances, aided by flexible exchange rate regimes.
Moreover, decreasing levels of net government debt provide the MILA countries with additional flexibility to utilise fiscal and monetary policies. MILA’s public debt in 2013 was 21.3 percent of its GDP, below the emerging market average of 44.8 percent. In terms of inflation, in 2013 the three MILA countries displayed some of the lowest levels of inflation seen in Latin America, with an annual inflation rate of 2.6 percent on average (Latin American GDP weighted at an average of 8.6 percent).
Despite these fundamental strengths, last year the MILA region was hit harder than emerging markets as a whole in both the equity and fixed income markets. This situation has provided a great investment opportunity, as investors can now buy assets with great fundamentals at a discounted price. MILA corporates offer better yields than US high yield corporates (with a spread of 23 basic points), despite having a better rating – the average rating of the three countries is A-. MILA yields are even higher than the ones offered four years ago, when the average rating was split BBB/BBB+.
In equities, price-to-earnings ratios in MILA are below its historic average, suggesting it is still discounted despite its positive year-to-date return. As a consequence of discounted valuations and the decline of bad news in emerging economies, investor sentiment shifted, turning positive in March and luring inflows into equity and fixed income mutual funds in emerging markets. In the equity market space, most inflows were directed to Latin American equity funds, while in the fixed income space inflows were seen only in Latin American bond funds.
Do you believe that regional regulations are supporting economic growth?
We believe the regulation in the region offers a better investment environment, which supports economic growth, although there is still room to improve. To further boost its competitive edge, the region must close its infrastructure gap, crucial for creating a business and investor-friendly environment. Free trade agreements and regional integration, such as the Pacific Alliance, help to attract the required investment.
Moreover, changes in regulations, tax systems, intellectual property and labour laws will encourage risk-taking, attracting talent from all over the world. The region is already moving, with Colombia encouraging utility companies to share their fibre optic cable networks and funding the development of supply chain applications that force smaller companies to adopt more innovative business models.
In addition to this, the Chilean government’s start-up programme is attracting entrepreneurs from all over the world to build a culture of risk-taking and innovation, creating a Latin American entrepreneurship hub. Although there is still much work to do to improve productivity, the region has achieved considerable progress in strengthening its institutions. For instance, MILA stands out among emerging markets in ease of doing business and world governance indexes.
What do you think the future is for emerging markets in general?
Emerging markets’ share of world GDP in PPP is around 57 percent. Despite this, their share of equity and fixed income global markets remains below 14 percent. Developed countries debt represents 88 percent of total world debt and in many cases a larger percentage of the countries’ GDP, creating a drag for future growth. In the following years, we expect emerging economies to gradually increase their importance in the equity and bond markets.
From a growth perspective, emerging economies may still benefit from a demographic momentum, while developed ones are dealing with the ageing of their populations (see Fig. 1). This dynamic will continue in the following years, and will lead their dependency ratio to increase to 0.71 in 2050, whereas in emerging countries it should remain close to present levels (0.23 in 2050), according to the UN.
The higher proportion of a working-age population, combined with higher investment as a percentage of GDP (the average for BRICS, MILA and Mexico is 27.6 percent in 2019 according to the IMF, compared to an average of 22.4 percent for the US, Euro area and Japan), will allow them to keep growing at a faster rate than the developed economies, providing interesting investment opportunities.
While emerging markets are not impervious to global shocks, they have carried out reforms that provide more insulation from external stress than in previous decades.
The key to achieving sustainable growth will be to develop additional productivity reforms which invest in human-capital-improving education systems. Although we are positive about the future of emerging markets, it is important to keep in mind that this term engulfs a lot of different countries, and it is important to differentiate between those taking the steps to maintain their growth rates and those that are not.
What products does Credicorp Capital offer to gain entry to these markets?
Credicorp Capital has a wide product offering which satisfies most investor needs. This summer we will be launching Cayman and Luxembourg domiciled funds in the equity and debt markets. The Condor Equity Fund will invest exclusively in MILA, while the Latin American Corporate Debt Fund seeks to invest 40 to 60 percent in MILA and the remainder in Mexico and Brazil primarily.
These funds will follow the same investment processes and benefit from our regional expertise, which have made us leaders in our local markets. For instance, in Peru we lead the mutual fund market with a 40 percent market share and manage 16 mutual funds, covering fixed income, balanced and equity funds granting exposure to Peruvian and Latin American markets.
In the alternative markets sectors, we are in the fundraising period for our Peru Real Estate Fund and our Colombian Real Estate Construction Fund, which offer investors access to MILA’s developing real estate sector and experienced investment team, which currently manages a $250m real estate income Colombian fund, which has consistently delivered double-digit returns. Likewise, in Chile we have structured several club deals, granting investors access to the hydroelectric, dairy and real estate sectors.
In the past few years we have also entered the asset backed security market. In Peru we developed an operating lease programme, which has issued over 10 notes granting investors access to cash flows from Peru’s blue chip companies who serve as lessees. In Colombia we have a fund through which we finance auto purchases for taxi drivers. We also see great potential in the infrastructure sector, which we hope to enter in the short- to medium-term.
We provide technical advisory services to Atlantic Security Bank (ASB), Credicorp’s offshore bank that serves the group’s private bank and family office. Our strategy team – widely respected in the region and specialised by asset class – is an invaluable part of our advisory services, recommending global, local and mixed portfolio allocations. In addition to serving as investment managers for ABS’ funds, we analyse mutual, hedge and private equity funds that invest outside of MILA, to complement our clients’ global portfolio with the best investment vehicles available. Likewise, we structure capital- and semi capital-protected notes granting our clients exposure to risky markets while protecting their capital.
How do you believe Credicorp Capital stands out from the competition?
The company is unique in that it is MILA’s first investment bank, born of out the merger of three leading financial service providers – BCP Capital (Peru), Correval (Colombia) and IM Trust (Chile). It is a truly regional bank with local expertise in each country in which it operates. Our focus in Latin America – and MILA in particular – has led us to distinguish ourselves as the partner of choice for investors in the region. We manage assets totalling $7bn in the region, and advise on an additional $5bn. Just like our parent company, Credicorp Ltd – Peru’s largest financial holding (NYSE: BAP, market cap: $11bn) – Credicorp Capital holds a focus on its clients at the core of its DNA.
We have assembled the most experienced investment team possible. Our strategy, investment management, investment products, and alternative investment teams are regional in nature, with a presence in every operational country. Our head equity and fixed income portfolio managers have over 30 years of combined experience investing in MILA. Our buy-side research team, composed of 14 people – including four CFA charter holders, specialised by industry – regularly meets with top management at target companies, as well as with their clients and suppliers, incorporating this information into proprietary models. By the end of 2014, we expect to cover 100 percent of the MILA 40 index, 80 percent of the MILA index (140 companies total in Peru, Chile and Colombia) as well as 50 percent of CEMBI Latin America, with an emphasis on Mexico and Brazil.
