Vast wealth will continue to be generated in Latin America as long as commodity prices remain high, according to leading private bankers.
The latest Merrill Lynch/Capgemini Annual World Wealth Report states that there were 371,000 high-net-worth individuals (HNWIs – those with more than $1m in investible assets as well as their principal home) in Latin America at the end of 2006, an increase of 10.2% on 2005. Total investible assets held by HNWIs in the region increased by a massive 23% in 2006 to $5100bn, against an increase of 11.4% to $37,200bn globally. Brazil, Latin America’s biggest economy, has 120,000 HNWIs, an increase of 10% on 2005.
More wealthy
Many Latin Americans have risen into the HNWI bracket for the first time because the region’s stock markets have been among the fastest growing during the past few years and because of high commodity prices – all-important in a natural resources-rich region like Latin America. Brazil’s Bovespa index, for example, rose by 38% last year and Chile’s stock market went up by 13.3%. Soya’s value rose 80% last year and copper’s went up by 35%. Brazilian mining group Vale recently managed to raise the price of its iron ore exports to Japanese and South Korean steelmakers by 65%.
Leading analysts say that the subprime crisis in the US has hit Latin America’s financial markets but that the region’s wealth management business will continue to perform well as long as China remains on a robust growth path and no significant drop in commodity prices takes place.
Darcie Burk, head of Merrill Lynch’s global wealth management group for Latin America, says: “The situation in Latin America today is absolutely different from that of 10 years ago, because of the fiscal and current account surpluses and the very high commodity prices now.
“The US subprime crisis has not had much impact on Latam yet. There is no subprime on the continent and Latin Americans do not have much direct exposure to mortgage-backed securities.
“Thus far, the region’s wealth markets are growing at the same pace this year as last year. Brazil and Mexico represent 70% of the market, and both have many positive in-country developments that may help to maintain their growth despite a global slowing.
“Mexico is much more dependent on exports to the US and could suffer in the short term if a recession in the US occurs. Brazil has some very positive aspects in its favour at the moment; it has in many ways decoupled from the US.”
Star performers
Brazil and Mexico have been the star performers in the region’s wealth markets. Forbes magazine’s latest survey of billionaires shows that 36 are from Latin America (Brazil has the highest number with 16, followed by Mexico with 10).
Many Mexicans have passed over the HNW threshold for the first time, because of a rise in the country’s main IPC stock market (it has risen by 113% during the past three years). Mexican Carlos Slim – owner of Mexico’s main telecommunications group, Telmex, and Latin America’s main mobile phone network, América Móvil – became the world’s richest man in July last year, with a personal fortune estimated at about $60bn.
Mexico has not had the fastest economic growth in the region during the past few years, but construction and personal consumption booms are taking place. However, the wealth creation process in the country could slow down dramatically if a US recession takes place (about 80% of the country’s exports go to the US).
As well as high commodity prices greatly contributing to wealth generation in Brazil, the country’s capital markets have been expanding dramatically. Last year, 64 companies floated on the main market of the Bovespa, raising 55.5bn Brazilian reais ($31.9bn) and creating many personal fortunes. However, the subprime crisis has had a clear impact on new listings: there have been fewer since it broke and not one company has floated so far this year.
According to Boston Consulting Group’s (BCG) latest Global Wealth Report, Brazil had one of the highest compound annual growth rates in assets under management in the world from 2001 to 2006, at 22.4% (the global average was 8.6% and only China surpassed Brazil with 23.4%). Research by PricewaterhouseCoopers indicates that there are 2000 ultra HNWIs in Brazil with between $15m and $20m in bankable assets.
Decoupled from US
Eduardo Oliveira, head of wealth management at UBS Pactual in Brazil, the country’s second largest private bank with about 5000 private clients, says: “There is a certain amount of truth to the view that Brazil has been decoupled from events in the US. Real estate financing is underdeveloped in the country. However, there has been a liquidity crunch in Brazil since the subprime crisis, and the stock market has been very volatile. The US is an important trading partner for the country and it would certainly be affected if there was a recession in the US.
“If we take a slightly longer view and return to 2003 and 2004, we will see that much of the wealth generation in Brazil came from higher commodity prices. In 2006 and 2007, it mostly stemmed from strong capital markets. As those markets are weaker this year, wealth creation will mostly derive from the continuation of high commodity prices.”
UBS Pactual forecasts that the Bovespa will rise by about 30% this year. Mr Oliveira says that the drop in the initial public offering (IPO) market may to some extent be compensated by a strong mergers and acquisitions (M&A) market. “It is a natural process: many big companies became huge after undertaking IPOs and are now cash-rich,” he says. “They are likely to be on the acquisition trail.
“I don’t think we will witness the billion-reais IPO deals that we saw during the past couple of years, but consolidation of small and medium-sized enterprises could take place.”
Asset allocation
One of the other most important trends in asset allocation among HNWIs in Latin America is a move away from fixed income to variable. However, wealthy Latin Americans still hold a higher proportion of their wealth in fixed income than their counterparts in the rest of the world.
According to Capgemini/Merrill Lynch, 29% of HNWIs’ financial assets in the region are in fixed income, compared with 21% for wealthy individuals in the rest of world. Rich Latin Americans hold just 22% of their wealth in equities compared with 31% for HNWIs in the rest of the world.
Furthermore, domestic investors in the region, especially in Brazil and Mexico, have become more active in their own markets. This trend was accentuated by the subprime crisis, with many Latin Americans deciding to trust domestic markets more than those in the US or Europe.
“Wealthy Brazilians used to send their money overseas for hedging reasons, such as high inflation domestically,” says Fernando Vallada, ABN AMRO’s head of private banking in Brazil. “Today, there is no reason for them to do that and if they send it abroad, it’s for diversification purposes.
“In 2005, I estimate that 60% to 70% of their assets were overseas, 40% to 30% domestic. At the start of 2007, it was divided 50:50 and, since the subprime crisis, 60% have been held onshore, 40% offshore.”
However, this may not be true of all Latin American countries: it is estimated that Argentinians hold up to $200bn outside their home country. They still do not trust the country enough to bring their assets home.
Onshore opportunity
BCG says there is a big opportunity for international wealth managers to become more involved in managing the onshore assets of rich Latin Americans. Local players and international banks have traditionally dominated this market in the region. For example, Ms Burk says that Merrill Lynch plans to offer private clients in Brazil real-denominated products soon, including cash-equities mutual funds, equity derivatives, and some pooled assets.
| Victor Aerni, a partner at BCG, says: “The growth of affluent households with assets under management between $100,000 and $1m [in Latin America] has also been a boon to onshore investments, because these households are more likely than richer households to keep their wealth onshore. In addition, offshore investments have faced increasingly restrictive regulations.” |
In its report, BCG says that wealth managers in Latin America had the highest median pre-tax margins in the world in 2006: about 55%, up from about 49% in 2003. Top-performing players in the region complemented high gross margins with strong growth in assets.
High-net-worth Latin Americans hold a much smaller proportion of total global wealth than their counterparts in North America and Europe. However, the region’s wealth management business is among the fastest growing in the world and is likely to receive considerably more attention from wealth managers in the future, as markets in more developed regions become mature.
