A bit earlier in June I had the pleasure of spending five days in the Andean countries visiting Santiago, Lima and Bogota. The purpose of the trip was twofold: first to visit clients, mainly pension funds and other institutional investors, and second to see local companies for corporate research meetings. As a bonus I had the opportunity to taste one of the most exciting up-and-coming culinary regions of the world, as local chefs are blending local ingredients and traditional dishes with state-of-the-art techniques.
Perhaps the most important point from the client meetings is that the Andean pension funds increased their overall exposure to emerging market debt and equities in the first four months of 2015. They started trimming their equity exposure in May, but kept fixed income unchanged. On a further positive note (from a fixed income perspective) they expressed little to no concerns about the Fed lift-off on rates. However, they were surprised about the poor economic numbers in Brazil and even more so when I presented our view on the country (for more colour read the post “Brazil: Baby steps on the long road of adjustment” by Julio Callegari, 21 May 2015).
During my talks I gained the impression that the Andean pension funds took profit on their emerging equity positions and re-invested the funds in local rates offering steep yield curves. However, as those were direct investments, EM local currency bond funds saw none of that flow. As the pre-dominant Fed view is one of gradual and orderly correction, higher policy rates should not weigh on EM assets. And regarding Brazil, the typical local pessimism vs foreign optimism seems to dominate. The situation in Brazil is not improving and the adjustment will likely be longer and deeper than expected, but as it is the biggest country in the region, it is difficult to imagine the Andean pension funds exiting the market even if the environment were to further deteriorate.
On the research front, I tried to book as many meetings with commodity-related companies as possible, especially in Peru where there are plenty of mining companies extracting different kinds of minerals. The general feedback from the research meetings was positive as the companies are well aware of price risks and volatility. Therefore we mainly discussed capital expenditure cuts, cost control and liquidity. That was re-assuring, as mineral prices are down by more than half in the last twelve months, visibly squeezing margins. Away from commodity-exposed companies I could not find any significant signs of concerns about the current state of the economy in Latin America. Plans and budgets are on track and companies are not surprised about the level of client activity, which means that companies had been prepared for the recent economic slowdown in the region.
In sum, my impression from the region is positive on both fronts. Companies have done their homework and remain focused on the current market and economic realities, whilst the pension funds are likely to remain invested in EM assets, especially fixed income, as long the Fed does not create another “taper tantrum”, which is not expected by the investors and companies I met. As for my culinary experiences, I think I can leave that to another post in another blog.