Two factors particularly influenced the growth of wealth management in Latin America over the past decade: China’s appetite for raw materials, which whisked commodities prices into a super-cycle and pushed Latin American economies – and individuals’ income – up with them; and the deepening of financial markets across the region, which created more appealing onshore investment products.
The former has lessened. Countries are suffering because of China’s reduced imports, with Latin America's largest economy, Brazil, in particular feeling the pinch due to this lack of demand. Local investments look likely to be less relevant to wealthy individuals, who, because of economic as well as political uncertainties, prefer to lock money safely offshore. This, inevitably, gives a leg-up to international firms.
Under threat
“Probably five or six years ago, our main competitor was a local firm,” says Gonzalo Córdova, head of wealth management at LarrainVial in Chile, a country that provides one of the most mature investment markets in Latin America. “Now our biggest competitors are the large banks in Europe or the US. We try to compete and have invested in our platforms, but the high end, the very rich clients, take the largest part of their money to [the likes of] JPMorgan.”
And those firms, says Mr Córdova, are already ramping up their presence on the ground. “I used to see the relationship manager from one of these international banks in Santiago twice a year; now I see someone from that firm every week. They probably want to cover the Chilean market more frequently to serve those clients,” he says. According to industry data, wealth management in Chile grew by 8% on average between 2002 to 2012, about twice the rate of gross domestic product (GDP) growth. Business expansion has halved since 2013.
Furthermore, affluent clients traditionally served by local firms are likely to see their disposable income reduced. Forced to choose between consumption and savings, for example, Brazilians are more likely to cut the latter, according to Reinaldo Le Grazie, chief executive of Bram, Bradesco’s asset management operation. He adds that local clients are more prepared to look offshore.
Genaro Poulat, head of Citi Private Bank for Latin America excluding Brazil and Mexico, says: “After the [financial] crisis, many Latin Americans had brought funds onshore. Argentinians, Chileans and others moved assets back to their countries in 2007. Now that Latin American economies are starting to decelerate, funds are going back to the US.”
Boston Consulting Group confirms this trend. According to its Global Wealth Report 2015, while Latin America represented only about 2% of global private wealth in 2014, its share of total offshore wealth was a more significant 11%. This figure is expected to grow to 14% by 2019.
A need for reinvention
Tough economic conditions are expected for a while yet. The International Monetary Fund (IMF) predicts that Latin America’s aggregate GDP growth will be only 0.9% this year, representing a fifth consecutive annual decline.
Although the IMF forecasts a slight improvement for 2016, there remains much uncertainty over the influence of external factors on the region. A sharper downturn in China would contribute to a further weakness in commodity prices and add pressure on Latin America’s exporters. An improving US economy and its higher interest rates will continue to lure international funds away from Latin American markets, further weakening those countries.
“China’s commodities backdrop is a new cycle of sorts,” says Tulio Vera, JPMorgan Private Bank’s chief investment strategist for Latin America. “Many countries misread the commodities boom as something that was here to stay, a change in the structure of the global economy, when in reality it was just another cycle. The region has to reboot itself and it needs to reinvent itself.”
Social risks
To make matters worse, corruption scandals in Brazil involving senior politicians and corporate leaders have dented the confidence of many investors. This has further tarnished a business environment that has somewhat deteriorated in recent years, making Brazil's starring role in the Brics group alongside Russia, India, China and South Africa seem like a distant memory. Indeed, a recently introduced buzzword by Gene Frieda, global strategist for Moore Europe Capital Management, is 'Chinzila', the nexus of China and Brazil invoked as the harbinger of global doom.
And it is not just Brazil that has suffered such a reversal in fortunes. “Brazil seemed to be on a good path until five or six years ago, and after the financial crisis it was one of the first emerging markets to bounce back and was included in the Brics group, which was perceived as [representing] the future of the world [growth] until not long ago,” says Mr Vera. “[But] Brazil has had five years of policies that are not business friendly.” Chile’s struggles are a more recent phenomenon, from after president Michelle Bachelet’s second election win, he adds, saying: “Chile was [praised] for many years for its reforms, [and recognised as] one of the best managed economies in the region. That has changed in the past couple of years.”
Another cause for concern is how economic issues are bringing with them higher security risks. In Brazil, army commander Eduardo Villas Boas recently warned about the dangers of the current economic crisis becoming a social one that would affect national stability. Similar sentiments are felt elsewhere in the region, particularly in countries where, because of their recent past, wealth breeds threats to safety.
Citi’s Mr Poulat believes this would explain why tax amnesties to encourage individuals to repatriate offshore funds did not always work. “Past amnesties in Argentina and Colombia, for example, were not successful, and the reason for this... is security,” he says. “This is a concern for many families: the wrong information in the wrong hands means a higher security risk.” Offshore investment products are naturally more appealing if social unrest becomes a possibility.
Local knowledge
During the previous economic cycle, Latin American countries’ good fortunes had encouraged local wealth managers to expand and leverage their extensive network of clients, often on the back of substantial retail and corporate banking operations. Local banks’ knowledge and access to local investment opportunities was another point of strength during the good times. As capital markets developed across the region – from local currency infrastructure bonds in Brazil to Mexico’s real estate investment funds – it was local players that had easier access to the new products.
Many local firms have indeed been successfully expanding until recently. Itaú Private Bank, which is based in Brazil and has a considerable footprint across Latin America, saw assets under management grow by 20% in the three years to the end of 2014. Even more impressively, Banco de Bogota, headquartered in Colombia and with a growing presence in Central America, expanded the same metric by 60%.
Now that the pendulum is swinging back towards offshore, larger international players are better placed to compete thanks to their more immediate access to US-denominated products, for example, and because of the level of sophistication and protection their investment solutions can provide. Regional and international players’ growth rates may change with the new economic conditions.
“Local providers have improved their presence across Latin America. You get bigger banks such as Itaú, Banco de Bogota, Bancolombia, Banco General in Panama, Banco Industrial in Guatemala, Banco de Chile, all providing alternatives to invest locally,” says Mr Poulat. “But foreign banks such as Citi, JPMorgan, Deutsche Bank or Santander have products that are more sophisticated, that are beyond normal investment.”
Gonzalo Algorri, head of private banking at Santander’s retail and commercial banking division, agrees. He believes that this trend is most apparent in Brazil, where clients are now requesting country and product diversification with a low correlation with local assets. Santander finds itself in a good position as it has a wide local network but can also benefit from the group’s international coverage.
Offshore masses
The new environment’s biggest effect will be on mass-affluent clients, who typically have limited access to offshore investments because of the associated costs. Demand from less wealthy clients is, however, still likely to rise. In a sign of financial markets orthodoxy, the Brazilian Securities and Exchange Commission has relaxed rules that limit foreign investment in an effort to make the investment management industry more competitive, reduce costs and improve transparency.
“Brazil’s funds industry has faced persistent tough conditions over the past two years, including rising political and economic risks and ongoing investigations of corruption allegations against high-profile individuals and companies,” wrote credit agency Standard & Poor’s in a report on the changes in Brazil, also known as Instruction 555, which came into effect in October.
The rules are meant to benefit local players more significantly than international ones, which would need a local licence and local funds to serve smaller Brazilian investors. Wealthy individuals wanting to move funds offshore are likely to have done so already through an international firm.
“The new regulation allows lower investment levels [to mass affluents], but to do that they need a local investment fund. This doesn’t help foreigners much,” says Bram’s Mr Le Grazie. “Even if foreign firms have local funds, they need scale; we have the distribution in Brazil, they don’t. We distribute the funds in Brazil and we invest abroad. It’s difficult for foreign providers to access clients directly, and we have a strong brand.” He adds that banks such as Santander and HSBC have it all: a local licence, a strong brand and an international network. But with Bradesco’s recent acquisition of HSBC’s local operations, there’s one less such player around. “That’s another point in our favour,” says Mr Le Grazie.
The long game
Experts agree that the economic structure of most countries in Latin America will support them through the current environment and enable them to finally re-emerge in better shape in the medium term. The effect on local wealth managers is less certain, however. As governments adjust to the new circumstances and focus on new development models, bankers and financial regulators are being advised to follow suit. During such uncertain times, helping small savers invest abroad may be smarter than offering tax breaks to wealthy individuals to repatriate funds. This would benefit local investment firms as well as helping to develop a savings culture.
Uncertainty will affect markets for some time. “We’re looking at a multi-year slow-growth period that is unlike different periods of stress in the past, and it is not over yet,” says JPMorgan’s Mr Vera. “The world is still wrestling with the implications of a slower China on emerging markets and Latin America in particular. That reassessment will continue for a few months [or even] years until we get a sense of whether China stabilises or not.” But calling the future of Latin America’s wealth managers may be harder than predicting economic data coming out of China.
