Bridge over ocean
3 February 2017 Multimedia

Latin American Equities Markets

Risks and Opportunities

  1. Gabriela D. Santos
  2. Verena E. Wachnitz, CFA
  3. Luis Yance, CFA

A panel of experts discusses opportunities and risks of investing in Latin America. The panel includes Gabriela Santos, global market strategist of J.P. Morgan Asset Management, Verena Wachnitz, CFA, portfolio manager at T. Rowe Price, and Luis Yance, CFA, chief investment officer at Compass Group. The wide-ranging discussion covers demographic trends, government reform initiatives, and availability of credit on stock selection. They also break down strategies into growth and value as well as active and passive.

This information is accurate as of the date of recording.

[MUSIC PLAYING] MARIA DEL PILAR AMADOR: In our next session, we will talk about Latin American equities, risks, and opportunities. I would like to introduce to you my panelists. At my far right, we have Gabriela Santos.

She's Vice President in Global Market Strategies at J.P. Morgan Finance Global Market Insights Strategy team. In this role, she is responsible for delivering timely market and economic insight to institutional and retail clients across Latin America and the United States. She graduated from the University of Pennsylvania with a bachelor of arts degree in philosophy, political science, economics, and French. Thank you, Gabriela, for being with us.

Next we have Verena Wachnitz, CFA. She's Vice President at T. Rowe Price Group incorporation and T. Rowe Price International Ltd., and a portfolio manager for the Latin American Fund. Prior to this, she was an analyst in the Equity Research team covering Latin America. She earned a B.A. in economics and master's degree in finance from Universidad de San Andrés. Thank you, Verena.

Finally, at my right we have Luis Yance, CFA. He is the Chief Investment Officer and portfolio manager for Mexican Equity Strategies at Compass Group. Previously at campus, he was Colombian Chief Investment Officer and portfolio manager for Colombia All Cap and Andean Small Cap Equity Strategies. He studied industrial engineer and computer engineer at Universidad de los Andes and holds a bachelor of science in management from Tulane University and an MBA from the Leonard Stern School of Business at New York University. Welcome, Luis.

Well, thank you very much, you all, for being here with us. I would like to invite you to briefly tell us a little bit about your role in your film and how you approach investing in emerging markets and probably if you have a couple of highlights, just to begin this panel. And I would like to start with you, Gabriela.

GABRIELA D. SANTOS: Great, so I'll go first then. Pretty much what my job description means is that I do economic research within J.P. Morgan Asset Management. And part of the role is also to meet with our clients, both on the retail and on the institutional side, to talk about investing opportunities, tactical as well as strategic. And here we're really talking about global portfolios.

Myself in particular, I focus a lot on research around the US and Latin America as well. In this role, we are not directly affiliated with any sort of product line or specific product, although certainly we have a very close relationship with our managers, especially in the emerging market equity team. The approach around emerging market investing in J.P. Morgan Asset Management is-- I would say we have two product suites, one which is really focused on bottom-up research with our 30 plus analysts around the world, and then the second product line has to do with a combination, both of top-down as well as bottom-up views. And as you can imagine, that's the group that we have a closer relationship with.

So I included a few slides here, because certainly, in our conversations with our clients, we've been talking much more about emerging markets over the past 12 months. And finally, it's not to have only negative things to say, which has been a nice change of pace. And the reason that we've really started feeling much more, we could say, cautiously optimistic about emerging markets and about feeling confident to have an overweight in EM in a global portfolio has a lot to do with this slide.

So as we've heard before, whether it's demographics or whether it's population, growth of various kinds, certainly, emerging markets will tend to grow faster than developed markets, right? By virtue of being emerging, let's say. What we care about in our global portfolios is not just the level of growth of emerging markets, which is what we're showing here in the purple line. But what we care about is the EM growth alpha, meaning, how much faster is emerging markets growing compared to developed markets?

And as you can tell-- and that's the light gray area here. And as you can tell, that had reached an incredibly low level towards the end of 2015, beginning of 2016 where EM was really only growing 1 percentage point faster, right? Really not worth the risk, if you're a global investor, to really go out and reach for opportunities in EM to the same degree that, perhaps, you were before.

And finally that started improving, and we can finally sustainably say we think that EM growth alpha is returning to the level that we think makes sense, which is around 3 percentage points faster than developed market growth. And this, of course, is economics. But if you look at the next slide, this has a very tight relationship with performance.

So the light blue line-- no, sorry. The light gray line is exactly that EM growth alpha-- so how much faster EM is growing. And then the light blue line is the difference between, or the ratio between, EM equity performance and DM equity performance. And you can see, certainly, the lines move together, right? When that EM growth alpha was shrinking for so many years-- for five years-- EM was underperforming developed markets. Makes sense.

However, we're finally in that positive camp here, where the gray line is moving upwards again-- and we think sustainably so. And as a result, the light blue line is moving upwards as well. So EM is outperforming again as well.

So we've been having a lot of conversations on the institutional side to make sure our clients are taking advantage of that. We're seeing a lot more of them become overweight emerging markets-- I think largely so, at this point-- as well as with our retail clients-- on the private bank, on the financial advisory side-- which, a lot of them had really gotten to a point where they had 0% exposure to emerging markets. So making sure we're even getting to an underweight or even a neutral position, because here, cyclically, we think we're in a very positive place for EM.

In terms of LatAm, which is the next slide, this comes from a material we put together called our "Guide to the Markets" book. And we have one exclusively for Latin America. And here on the left, we're breaking down growth in Latin America into its main drivers. You can see clearly it's much more of a consumption-driven, consumer-driven kind of economy on an aggregate, and has certainly been suffering from that drop in domestic demand over the past couple of years.

We would share the view that was shared this morning, which is that we expect LatAm to exit recession this year. So in terms of that improvement in growth, certainly LatAm is a region that's very much exposed to that shift in the growth alpha. And then more medium to long-term, there is where, perhaps, we're still watching in order to see whether we really start tackling the gray part-- or the persistent lack of investment spending-- in order to see if, really, we get structurally more excited about the growth potential of the region.


VERENA WACHNITZ: Great, thanks. Should I just--


VERENA WACHNITZ: So yeah, as Pilar was saying, I manage Latin America Fund at T. Rowe Price. It's a long only fund, actively managed. I take a long-term investment approach and focus mainly on high-quality growth stocks, but also occasionally opportunities in value stocks or other areas.

I've been doing this for around three years. It'll be three years now, in March. And before that, I was covering Latin American equities, also for T. Rowe Price, covering a variety of sectors. So it's been around 13 years looking at LatAm equities. It's definitely been a fun and interesting ride, I would say, and I expect that to remain the case going forward.

I just wanted to share a brief message on the region, and my thoughts on the region, with you. I think, as most of you probably know, the markets in LatAm have started to turn. 2016 was a good year. '17, so far, has been good. But if you take a longer-term view, it's been many, many years of underperformance. So the chart here just shows you the MSCI Latin America versus S&P and MSCI World. It's been a long period of pain. And if you put that move in perspective, maybe it may still be relatively early.

In terms of the work I do-- and when I look at the companies that I invest in in the Latin America Fund, I still find valuations fairly attractive. Sometimes, if you look at the short-term, multiples may start to look full or fair. But you think that-- as Gabriela was saying, we're just coming out of a recession of a weak period. Growth is going to improve. I think the outlook for earnings growth, in general, is positive-- with differences across the countries, of course.

The other reason I'm optimistic, in general, on equities in the region quite constructive-- if you go to the next slide-- is that I think the outlook for reforms is as positive as it has been since I've looked at the region. We've had, in Mexico already, some reforms under Enrique Peña Nieto. Now the outlook is being challenged by what's happening with Mexico's largest trading partner and the relationship there. But I think the reforms were fairly successful and will probably help at least mitigate part of the blow from whatever happens there, we'll discuss it. Brazil, the significant change in direction from Dilma after she was impeached. With Dilma, we now have major fiscal reforms. We are spending a cap implemented. We have pension reform, which is essential for Brazil to become sustainable, for Brazil's economic model to be sustainable.

And I'm quite optimistic that this reform can go through. There are also some micro-reforms. It's really-- I think it's really interesting what is happening in Brazil. In Argentina, we had a 180 degree change from Christina Kirchner to Macri. Seen a lot of challenges, but clearly going in the right direction.

Peru we had the election of PPK last year. He's very marker friendly, and I think he's doing the right things. And growth there should also be solid. We'll see what happens in Chile with elections this year.

So I think the backdrop-- in terms of the policy making and macroeconomic management-- is as good as it has been. The challenges are there, but at least they're being addressed by competent people. We may not go back through the high, fast growth rates that we saw during the commodity boom. But at least it will be more sustainable growth. And I think that's a very good one for investors.

MARIA DEL PILAR AMADOR: Thank you very much.

LUIS YANCE: Thanks [INAUDIBLE]. Well, my name is Luis Yance, as she said. I've been working at Compass Group for about five years, initially in Columbia. Our running Andean strategy is now here at the head of the storm-- Mexico, obviously-- for the next couple of years. Also running the investment, but also running the portfolios on the equity side.

And prior to that, I spent almost 10 years at BlackRock in the US doing global equity, especially mainly on the commodity side during the super cycle. So here are Compass-- for those of you that do not know Compass-- we're one of the pure LatAm focus asset managers. We've been investing in the region for about 20 years. Mainly, you know, equities, fixed income, and alternatives, especially on the real estate.

And I would say what makes us unique-- and what we do in Mexico but it applies to some of the other offices-- is that we try to build portfolios to generate alpha from a bottom up perspective. I mean, we take into consideration-- we can talk about it later-- the top down views. But at the end of the day, you know, having a vast presence across the region-- we have 40 research analysts sitting in the different cities in Chile America looking at companies, meeting with regulators, looking at-- meeting with suppliers, building financial models.

At the end of the day, yes, we understand the macro of Chile America. But we think we could add a lot more value by being bottom up. By investing in companies that-- regardless of where we are in the economic cycle-- that will prove to be very important, especially for Mexico in the next couple of years.

You can always find companies. We believe we could always find companies that could deliver results above what people expect. That could do much better, irrespective of what's going on with the cycle, whether it's growing or not growing. And that's how we try to add value.

So the portfolios we build tend to be highly concentrated, high convection portfolios. Benchmark agnostic-- we try to look at companies. Whether they're in the benchmark or not, we don't care. We just want to find good companies. At the end of the day, that expands our investable universe quite a bit.

We don't have a specific style. If you ask, you know, we're not necessarily value driven or growth driven. It just depends on the kind of opportunities we're finding. Because we invest a lot in small and micro-cap companies, we tend to have a growth bias, obviously, in general terms. But we go where the opportunities might be.

And at the end of the day that doesn't mean having a concentrated portfolio that we're on a higher risk profile. Actually, our portfolios tend to have lower risk, better returns, which is sort of where we're looking for in general terms.

MARIA DEL PILAR AMADOR: Thank you everyone for this introduction. As you pointed out, 2016 and has been a very positive, active year for emerging markets, and Latin America obviously hasn't been the exception for this trend. However, the region is still under weighted in indexes.

So I would like to ask you, Gabriela, what you think is the reason that this is still happening? Are there any arguments to increase the exposure to Latin America within the emerging markets? Any arguments to make here, in terms of increasing maybe their participation in the indexes?

GABRIELA D. SANTOS: So I think we had such an interesting discussion earlier this morning about how you think about weightings in the international space, and certainly emerging markets is no exception. The way that we think about it is the representation of earnings. So if we could aggregate all the earnings in the world, what representation does emerging markets have to begin with right at the top?

And we would say at the peak of the commodity boom it was around 15%. Then in the worst of times it was around 8%. So perhaps if we normalize, somewhere around 10/ 12% would make sense, in terms of representation of emerging markets and in terms of a global equity index.

We are at a situation now where EM as a whole is already 11% of the index. So we feel generally that it is already a good representation of what we feel is important, which is earnings. And Latin America, within that, a smaller component because earnings are, again, being dominated much more by China, Korea, Taiwan. So in our opinion, perhaps a little bit different from what we heard this morning, we feel that actually the weightings are appropriate


GABRIELA D. SANTOS: That are reasonable. I don't know if you guys perhaps have a different view. But that's how we would look at it.

MARIA DEL PILAR AMADOR: Thank you. And you were mentioning that you focus on companies. That-- and that you understand macroeconomics, but it's not their focus. However, is there any influence of macro in terms whenever you make this topics or company selections that this has changed over the time, or how is your investment process has to do with macro?

LUIS YANCE: Yeah. I mean, definitely macro is a component of our investment process. Because at the end of the day, Latin America doesn't lose altogether. You always have a few countries that are doing well, others that are not doing so well, and others that, unfortunately, are doing terribly.

So clearly the macro has a lot to do with it. But we try to operate in as we look at companies, and how the macro really impact those companies. As opposed to saying, I like Mexico or not.

I mean, even though right now probably Mexico is in the eye of the storm-- as I mentioned it before-- we're going to find companies that will do OK. And if the currency appreciates, we'll find companies that will do OK. The currency depreciates, there are companies that will do OK. So we try to build in our macro views into the companies.

And try not to think too much about the macro, because at the end of the day, it's incredibly difficult. I'm not going to say it's easy to pick stocks the right way and understand the companies the right way. But that's where we feel we have the advantage.

I mean, getting the macro right is difficult. You have to pay attention, I guess, to the macro. Put together through your investment process. But you've got to also find and be honest to yourself and say, you know, where do you add value?

Some people do add value on the macro side. Some people don't. Some people try to do a little bit of everything at the same time, and they end up failing. So what we said is, we're good at picking companies. We're good at understanding them. And we're going to try to see-- in the current macro environment-- would they do OK? That's how we try to put the macro into our perspective.

MARIA DEL PILAR AMADOR: Thank you. And in your case, Verena, it's somewhat different?

VERENA E. WACHNITZ: I also have a bottom up approach. And I agree, you can find companies that do well in any environment. and we've seen many examples over the past years. In Brazil, for example, companies that-- posting double digit same store sales. And, I mean, it's a recession. So you always have those long-term winners.

I would say macro-- the way I incorporate it in my process-- is as inputs into the fundamental analysis. But I also tried to be very wary of those-- which we have a lot in LatAm-- sharp changes in the macro and political environment. We've had this in Brazil, we've had it in Argentina, and we may be going through something like that in Mexico. And those large inflection points are strong drivers off performance both ways.

They usually are priced in very early. So, for example, in Brazil a year ago from now everyone was extremely pessimistic. The environment was terrible. Since then, we've had a significant turnaround in expectations and political change. The market is up 80% in dollars. Half of that's the currency, half of that's the market.

So those shifts-- if you can spot them on time-- they-- it can make a big difference. If you think about Argentina-- also the big change that took place there-- it was actually the year before the election of Macri that the market performed well. So I am a strong believer in bottom up. But I think in Latin America when you approach those inflection points, when things go to extremes there are opportunities also to be very macro aware around those changes. Beyond that, I think it's an input. It needs to be-- macro assumptions, need to be reasonable consistent across companies so that you can make the best fundamental analysis.

MARIA DEL PILAR AMADOR: You both mentioned currency. So how do you manage currency risks in your portfolios? Are you hedging currency risk?



VERENA E. WACHNITZ: I don't hedge the currency risk. I mean, currency is part of the total return, the way I see it. The-- as it was mentioned example of Brazil, sometimes the large portion of the return can come from currencies. That said, I acknowledge that currencies are one of the most difficult variables to forecast.

So I don't take active bets in regards to currencies or where they're going to go. I'm just very aware, again, of these extremes. When evaluations go to extremes in currencies-- as in stock or in markets in general-- it can-- on the margin-- affect the way-- my conviction across different companies.

And then the other thing that's really important with currencies in LatAm-- in emerging markets in general, but in LatAm specifically-- is watch what companies are doing with their balance sheet, and whether they have any mismatches that are exposing them to sudden moves in the currency. Fortunately, we are past the days of fixed exchange routines, et cetera. But there are still-- very sudden moves sometimes can hurt you if you're not well positioned. So be mindful of the way companies manage that risk.

MARIA DEL PILAR AMADOR: Is it the same case for you, Luis?

LUIS YANCE: Yeah, I mean we don't hedge it. We have to have a view, as we have to have a view in every macro variable. But I think what we try to pay attention when we look at companies is the streams. You know, what if the currency appreciates too much or depreciates too much.

Our companies have mismatches between the revenues they generated for incurring [INAUDIBLE] the debt that they may have. What do their cost structures look like? Are they highly dollarized, and do they have hedges in place.

And even if when you say, OK, if the Mexican peso, for example, depreciates-- there are a lot of Mexican companies that have operations overseas. But it's not only about the currency. Do they have the operations overseas? Now, it's even more important to know do they actually produce overseas to sell overseas. Because if you produce in Mexico and sell overseas we know now there's some noise around trade deals.

So that's how we think about, you know, the currency especially on the streets. And the way we try to build portfolios is in the ideal world we're not taking a strong view one way or the other. We would like to have companies that potentially benefit from appreciation, others from depreciation, and others that could be potentially currency neutral. Those are the hardest one to find.

But in that way at least, you know, if the peso-- we never thought the peso would go to 22, from 15 to 20. We did OK. If we had gone to 10, we would have done OK, I guess. It's just that we are supposed to try to take a view. We try to take a holistic approach, have a diversified portfolio, and clearly protect the streams. And that's what we do.

MARIA DEL PILAR AMADOR: Interesting. So there are many analysts that are expecting 2017 to be a more volatile year, just because of President Trump's policies. How do you expect the market to perform this year, from that perspective? And probably we'll begin with you, Gabriela.

GABRIELA D. SANTOS: Yeah, sure. So I think it's pretty fascinating that whatever your views on Trump or Republican policy is, I think it's pretty interesting that if you look at the VIX, right, i still at 11/ 12. This is not a 12 VIX kind of president, right? Regardless of what you-- if you think what he's doing is good or bad. I mean, it just has the potential to be much more disruptive.

So I think it's pretty much a no brainer to say that, yes, volatility is going to go up from here. Whether it's in the US, whether it's in equities or fixed income. And emerging market certainly will be no exception.

Certainly as it comes specifically to his trade policy-- which everyone expected the President to be different than the candidate. And what we're learning is perhaps the candidate is the candidate, or the President is the candidate. Meaning there is still likely the potential for a little bit more of a swing here in terms of trade policy. So, yes, we do expect volatility to pick up from just abnormally low levels that we're at right now.

MARIA DEL PILAR AMADOR: What do you think about that, Verena?

VERENA E. WACHNITZ: Well, I think Trump specifically is a significant risk for Mexico. For LatAm markets as a whole I think we come from a year that was very volatile, 2016. I mean, it started with the China growth scare, which effected LatAm a lot.

We had the impeachment of Dilma Rousseff in Brazil. We had Brexit, which affected the world as well. And then we had the US election. So it was a year with significant volatility already. So I wouldn't make a call specifically on the region. Mexico is probably in a tougher spot, I would say.

I think what worries me the most, in terms of sources of volatility for LatAm specifically, is more domestic-- it's also, I would say, domestic policies. Because '18-- and the market, again, moves very much in advance. '18 is a year where we have presidential elections in the two largest markets in the region. That's something that happens only every 12 years for Brazil and Mexico. And, yeah, we'll discuss more about that. But I think that could be a source of volatility also.


LUIS YANCE: Yeah, I tend to agree. I mean, Mexico, LatAm seems to be at least, finally, a bit isolated from those global big events. I mean, it was more-- as Verena mentioned-- China what impacted LatAm more. But clearly, you know, Mexico can't escape.

Whenever you look at Trump's policies, they will impact Mexico. And, you know, whether it's immigration and whether he's going to build a wall or not, it impacts Mexico. Whether it's trade and investments, clearly Mexico is the most exposed. And whether it creates a secondary effect on politics.

I mean, we talked about it earlier in the morning about what could do-- Trump policies in terms of populism around the world. And clearly, you know, Mexico-- different than some of the other economies within the region-- didn't taste the waters of populism yet. But if this rhetoric continues and you create a sensation of nationalism here and social unrest a bit, you know, a populist candidate could theoretically have a good chance of winning in 2018. Which would upset, I think, the long-term prospects a little bit for Mexico.

MARIA DEL PILAR AMADOR: Thank you. We have been talking yesterday and a little bit today about demographics. So we have witnessed that the emerging middle class is not experiencing the will that we have seen before. Do you have any views on this from an investment perspective?

LUIS YANCE: Yeah, I mean when you look at Latin America-- as it was said before-- you know, yes, it made tremendous progress in terms of growing the middle class. Now it's about a third of the population's middle class. And it's widespread. It didn't happen everywhere. I think, you know, certain countries like Brazil or Peru did better. Mexico, they didn't do as well in terms of growing the middle class.

And it's true that it's not going to grow as fast as it did in the past. You know, you added 12% more people into the middle class. Now it's 35%. Can we add another 12%? Hard to see it.

But with 35% being middle class, it's a big enough market right now to think about investment opportunities that already happened before, but are going to happen, you know, down the road. So you don't really need to-- need it to go to 60/ 70%. I think it's big enough now that you could find opportunities.

I think the problem you have-- from an equity standpoint-- is that not that many companies fit that bill. I mean, a lot of the companies in Latin America are relatively new. They come from monopolies, so they tend to have the whole pyramid. So if people are in the low end, middle end, or high end they have a product for everyone.

So those companies could benefit as people move up. But you don't have that many companies really focused on the middle end. I mean, there's so few coming. I would say over the past few years you have seen more companies focus on middle to high end that I think could benefit from those trends. But there's also trends that are more structural.

You could think of airlines and airports. As people get richer they start traveling. You can to shift from the boss into the plane. You an take advantage of those. There are companies listed that now cater the high end market-- you know, the shopping malls and those kind of things.

So there are ways to play. I mean, it will depend. I would say Brazil and Mexico probably have the most ways. But even smaller markets like Chile have that tendency. Because the Chilean market now has an even bigger portion of the population. So I think there are opportunities. It's just hard to put them together in a portfolio like you could perhaps in a global portfolio.

MARIA DEL PILAR AMADOR: And, Gabriela, does this changing demographics, does this impact your views in the long-term?

GABRIELA D. SANTOS: Yeah, so it's interesting that previous speaker had a J.P. Morgan asset managements capital market assumptions. And our team produces some of the research to come up with those final return assumptions. So an interesting tie-in there.

And the way that we end up coming up with the return assumption for emerging markets, for example-- which has an 8.75% over the next 10 to 15 years on an annualized basis for emerging market equities-- is we think about, OK, so what kind of expectations make sense for revenue growth? And the way we get there is thinking about what kind of expectations make sense for potential growth for emerging markets, right? And, of course, the inputs into demographics and thinking about the growth of the working age population, the labor force, is part of that.

So if we think about Latin America specifically, certainly it does not have such a, let's say, aging demographic problem as Asia. But the issue is that the working age population is no longer expected to contribute as much to growth as it did in the past. And the issue with that for LatAm is that-- if you look at a variety of countries-- productivity growth has barely been there.

So if you have less contribution coming from the labor side of the equation, you're going to end up with lower potential growth and lower potential returns. So that's how we think about how demographics fits into that. And as a result, over the past few years we've been lowering and lowering our assumptions for EM and LatAm growth, and hence, for potential returns over the next decade. Unless we see some of these new policies, some of these new governments really implementing the kind of reforms that would allow some sort of big productivity boost in the region.

MARIA DEL PILAR AMADOR: Thank you. And could you speak a little bit of growth and then with earnings. Verena, do you think earnings things are still weak in the region? Do you see any inflection point here?

VERENA E. WACHNITZ: Yeah, well, the region-- I mean, it's interesting because we talk about Latin America, but it's a number of very different countries. And if you think about the two largest countries in Latin America-- Mexico and Brazil-- they tend to go through very different moments in the economic cycle. At least that's been the case over the past few years.

So I think where we are-- a few years ago Mexico was in a very positive momentum from growths and earnings growths. The consumer was doing well. And it's still doing well in the data. But the incrementally-- if you look forward-- the environment is more challenging. You have inflation coming up. Consumer confidence is plunging rapidly on concerns on what happens with the relationship with the US and NAFTA.

So I think the outlook for earnings growth in Mexico is a bit more challenging. I think it will take time to feed through actual earnings. But I think, in general, for the domestic companies-- a lot of the listed companies in Mexico have exposure also to other countries and foreign currency revenues and earnings. But for domestic earnings, I think the outlook is a bit more challenging.

Brazil, on the other hand, is coming out of the worst recession it's had in at least a century, or probably it ever had-- to be contracted by 10 percential points from its peak. So I think the outlook for-- there is a lot of room for earnings to recover in a country like Brazil. Maybe not so much the top line, because I would expect the recovery to be relatively slow.

But if you think below that the top line, you have companies that have done a tremendous group of work in terms of expenses and costs. So I think there's going to be room for operating leverage, even with relatively modest top line growths. And you have interest rates coming from over 14% to probably single digits. And that's going to help earnings a lot. So I think the outlook for earnings is more constructive in Brazil and probably some of the other countries than in Mexico. But, again, it's always you have to look at it country-by-country thing.

MARIA DEL PILAR AMADOR: And Gabriela, do you have a new perspective or a different opinion on this regard?

GABRIELA D. SANTOS: No, we would agree. We are seeing a nice rebound in LatAm earnings overall. But as Verena was mentioning, certainly will depend on a country-by-county basis. And we are-- in terms of the link here with Brazil-- we are feeling quite optimistic about Brazil overall. But not because actually of the growth potential for this year.

We have a bit of a below consensus view when it comes to growth-- GDP growth-- in Brazil this year. We think we'd be happy or lucky to get, let's say 0.5% GDP growth. But the silver lining is it does permit the Central Bank of Brazil to lower rates, we think, at a much more aggressive pace than perhaps could have been expected otherwise. And as a result, really the driver here for earnings in Brazil specifically is exactly the much, much lower interest rate burden that these companies face. So such an interesting idiosyncratic story there. But, overall, we see earnings improving for the region.

MARIA DEL PILAR AMADOR: Thank you. I want to shift a little bit to talk about commodities. Luis, do you think that the super cycle has already ended or will it continue? How do you see it? And I would like to link my question with a question that we have just received from the audience. And they are asking that-- in a previous conference they said that commodities represent the 50% of the Latin American economies. So what are your views about economy-- the commodities over the next year?

LUIS YANCE: I mean, I think, you know, the super cycle, the way we witness it in the 2000s and, you know, the years after that is probably over, in that regard. Unless we get a disruptive factor, as we did back then, which was China getting into the global stage and consuming more and more of most commodities and becoming the largest consumer of a lot of metals. You know, 30, 40, 50, 60% of certain metals around the world were being consumed by China. The world was not ready, and therefore prices had to be significantly and sustainably above marginal cost to incentivize that supply than was dormant.

I think we are already caught up a bit with supply. We saw the chart with China no longer growing at, you know, those kind of rates. Those rates-- you know, 5/ 6% is good, but probably not good enough to create the tightness that we saw. So we probably saw the bottom as well, you know, over the past year or two.

So we'll probably go back to the natural cycles we had in the 80s and the 90s where-- for a certain period of time-- maybe supply is tight. And demand picks up, and then you get a spike in certain commodities. But then it goes back to normal. So I think-- thinking that prices will stay significantly above marginal cost is no longer the case.

What does that mean for I guess Latin America? I think there's two ways to think about it-- macro or micro. I think from a macro standpoint, clearly Latin America [? x ?] Mexico from an export standpoint was highly dependent on commodities. So they had to rethink their models, especially some of the Indian companies that are high [? level. ?]

And I think they're going through that transition process. That's why Peru is no longer growing at 6/ 7%. And maybe the sustainable growth rate in Peru has come down because of commodities. So I think it will depend going forward-- not only for the company-- or for the macro but also for the companies-- is whether you are-- because in the past, you know, commodities were going up and up and up. And it didn't matter whether, you know, your cost structure was on the low end or the middle end. Everyone was making money when oil was 100 plus or iron ore was 100 plus.

Now, I think what matters is what kind of geology you were blessed with in Latin America. So clearly, you know, if you think about copper, I think Peru is a better position than Chile. Because it not only has the growth coming in the next couple years to offset lower prices, but it also has good geology. And some of their projects work, even on their low prices in there.

So I think that that's going to determine whether you're a-- you can keep kid growing at current commodity prices, and whether, you know, geology has blessed you with lower cost structures. But at the end of the day, I think critical part of the question is to find-- not necessarily a new growth model-- but to complement it. And I think a lot of the Latin American countries were kind of slow to get to that point. But I think they're doing it.

I think it will take time. But I think a renaissance of certain manufacturing sectors in certain countries makes sense. In some other countries like Chile was able to diversify a bit beyond copper, and you have the salmon industry, the wine industry, et cetera.

So I think you're in that sort of process. Commodities will continue to be a critical part of Latin American economies. But I think we've got to be moving towards a new economic model that complements what we did in the past.

MARIA DEL PILAR AMADOR: OK. Thank you. Interesting. Verena, do you see any growth sectors now in LatAm, I mean, beyond commodities and besides what we have just discussed?

VERENA E. WACHNITZ: Yes, definitely. Maybe just to complement on what Luis was saying.


VERENA E. WACHNITZ: Yes, I must agree that-- with his view on the commodity cycle. I think probably the boom that we've seen will not come back. We're kind of going to a deflation scenario. But I think that's a good thing for LatAm. Because those cycles are always temporary. And now that I think the bulk of the correction is behind us.

And countries have adjusted, currencies have adjusted. So I think it's a good thing that that's behind us. And as I was saying at the beginning, now we have-- countries have woken up to the need to reform and to adopt more sustainable economic models. I think we're in that process, and it's going in the right direction.

So, yeah, the region is very exposed to commodities. But I think there are a lot of opportunities to invest across a variety of sectors and that-- that are not linked to commodities. And if you manage a fund actively-- if you're not necessarily benchmark constrained, as we were saying-- then I think you have the ability to look at those sectors. So you don't necessarily have to invest in the commodity area.

Of course, there are very high quality low cost producers with great reserves. If you want to invest in commodities they're good opportunities. But there's also a very wide variety of sectors with attractive growth opportunities in the region.

I think-- linking to the consumer and the rising middle class-- I think that theme is still there. It's been a bit of both, but I think it's going to come back as growth resumes in the region. And a lot of the industries that benefit from that-- there's a lot of sectors, goods, and services where LatAm is-- the penetration is fairly low. And large parts of the population still want to increase the consumption of these goods and services. Be it financials from banking, to insurance, anything related to consumer, consumer discretionary. From apparel to some services, maybe like tourism.

I think those are all interesting opportunities. Real estate, I think-- from housing to real estate. I think as economies recover, those sectors still have attractive gross opportunities. Infrastructure, the region desperately needs more infrastructure. So those are sectors where-- especially in the context of more market friendly administrations that want to attract the private sector to those industries-- could offer growth opportunities for the companies that have the right balance sheet or access to capital markets. And there are some good companies-- liquid companies-- in the region to invest in that area.

Maybe some of the fastest areas of growth in LatAm is e-commerce, which is very under penetrated. I think it's around 4%, versus double digits in other countries, including some EM countries. So I think that's an area of fast growth. But we also have some companies that have leading positions that offer a very good and improving and increasingly better value proposition to their customers.

Companies that are growing in-- gaining share in a fast growing market, but they're also expanding the addressable market by adding other products like payments, et cetera. So that's an area where, I think, in terms of where do you find the fastest growth. I think that's a really interesting area.

Now, if you get comfortable-- of course the market is very efficient. So the prices of the securities also don't look cheap. So you've got to get some comfort around the evaluation. But I think there are plenty of attractive growth opportunities in the region.

MARIA DEL PILAR AMADOR: Thank you, Verena. And, Gabriela, do you have a different perspective, or do you agree with what we have heard?

GABRIELA D. SANTOS: No, we would agree largely that the opportunities that we're looking at in the region are not necessarily your typical materials and energy and kind of companies. But that are really tapping into the under-penetrated consumer. And we would agree especially that it is about financials, consumer discretionary, health care as well. Think about Brazil and the penetration of health care companies there.

Bring that back to that slightly aging population in Latin America as well. And we've seen some interesting examples. Usually we think about technology as just Asia, right? Asia is really the technology hub. And there are some interesting idiosyncratic opportunities in terms of very innovative technology companies in Argentina, for example. So not thinking just of LatAm as a commodity kind of region, but also as more of a holistic more diversified opportunity set.

MARIA DEL PILAR AMADOR: And in terms of relative value [INAUDIBLE], are you seeing any attractive opportunities?


MARIA DEL PILAR AMADOR: In terms of relative value--

GABRIELA D. SANTOS: Relative value?

MARIA DEL PILAR AMADOR: Are you seeing attractive opportunities?

GABRIELA D. SANTOS: So I think in terms of the competitive advantage here, let's say, for us it would be much more on the financial and the consumer names, in terms of some very well-managed companies that have really written through what are some very difficult years here in Latin America and that have that competitive edge in terms of just being very, very well-run businesses.

MARIA DEL PILAR AMADOR: Thank you. If we now dig into specific countries. And, of course, we have to start with Mexico. Luis, do you think that stocks in Mexico are overvalued?

LUIS YANCE: I mean, I don't know if the right word would be overvalued. But they're clearly not a bargain. But I would say they're not as expensive as people might think. You look at the monitors and you see PEs of 17, they're expensive.

But, you know, Mexico used to be a 20. Let's start there. And the 17 is only a 10% to 15% premium to its historical average. So, yeah, they're slightly above average. But they're not necessarily that expensive. And that average takes into account the 2008/2009 crisis when PEs went as low as 8%-9%. So let's put that into perspective.

They were expenses a couple of years ago. And the argument was they're at 100% premium versus emerging markets. The average premium is 40/ 50%. Right now it's 40/ 50%. So they're back to the historical average.

So I guess the question is should they de-rate further because of what we're seeing in terms of uncertainty around Trump, around elections, et cetera? I mean, they could. But I think there are certain elements within Mexico that people forget about, and that may make them a little bit more resilient.

I mean, relative to other emerging markets you say, well, 40% might be unsustainable. Well, at the end of the day, there's not that many commodity linked companies listed here. Mexico is a very consumer driven market on the list the companies that tend to have a premium evaluation. The other part of the equation is, well, Mexico is slowing down. Therefore, those companies are very exposed.

You know, people forget that-- you know, this morning the previous speaker mentioned 20/ 25% of the S&P comes from overseas. Well, in Mexico it's even bigger. 45% to 50% of revenues of the listed companies come from outside Mexico. So they're a little bit more diversified than people think.

And you're not as exposed within those to what could happen with Trump's policies. Because a lot of those overseas earnings-- especially the ones in the US-- are with US operations. Because at the end of the day, you look at the exports out of Mexico, yeah, 80% goes to the US. But 2/3 of that is a related party, meaning companies that are in the US setting up shops in Mexico and sending it back to the US.

So you get those characteristics. And you feel like, OK, they might be a bit expensive. But then it also depends how you're looking at it. I mean, I talk to local clients and they would tell you, well, the market is at an all time high in local terms. I think it's expensive, blah, blah, blah. But then you talk to an international investor, and they'd tell you, you know what? In dollar terms, Mexican equity markets is at a five year low. Because you factor in the currency.

So I think-- and the last point I would like to mention is there's also quite a bit of divergence. I mean, there are certain stocks that are expensive, some of the high quality names. But, you know, you've started-- and you have started over the past few months to see big divergencies. That certain small and mid-cap companies that have been there under a lot of pressure, they started to look attractive. Certain NAFTA related companies are actually quite attractive, and pricing in the scenario that might be even one of the worst case scenarios-- that we can talk about it.

So you're starting to see opportunities there. Is it going to be challenging in Mexico? Yeah, it's going to be challenging. But I think the evaluation-- the overvaluation case-- I don't think is as strong as it was a couple years ago.

MARIA DEL PILAR AMADOR: Interesting. And, Gabriela, are you seeing any opportunities here in Mexico? what type of companies do you like?

GABRIELA D. SANTOS: So without speaking of specific companies--


GABRIELA D. SANTOS: --just thinking from our view overall of Latin America, I would say that unfortunately we view countries like Mexico and Colombia a little bit less favorably. Again, because we start more from a macro kind of view. So in terms of value, in terms of earnings growth, we do see a lot more opportunities elsewhere, I would say. Which we can get into something like Brazil really, I would say, is our favorite kind of market.

MARIA DEL PILAR AMADOR: And for you, Verena, which would be the case?

VERENA E. WACHNITZ: I think in terms of the discussion on evaluations in Mexico I have to at least partly agree with Luis. I don't think stocks are particularly expensive. I think the main risk might not be the multiple but the earnings estimate. That's where I see a lot of uncertainty more than-- I know it will go down.

There's so many options available. Tomorrow we could have a tweet that sets the market reallying, right? And NAFTA ends up being renegotiated on some favorable terms. And then the [INAUDIBLE] which is a market friendly-- for those who don't know it-- a market friendly party, wins the elections next year. And then it's just a slowdown.

Or we may be in a scenario where the wall, NAFTA la vista, and we have AMLO winning the elections, the populist candidate that was alluded to winning the elections next year. And in that scenario, of course, earnings will go down. And maybe the multiple could compress as well, if we have a scenario of populism. So, yeah, I think a lot of uncertainties that I would highlight.

MARIA DEL PILAR AMADOR: Thank you. And if we talk a little bit about reforms here in Mexico, what will be the effects that you will be expecting of the reforms that Mr. President Enrique Pena Nieto has put in place?

GABRIELA D. SANTOS: So it's interesting that for our more international clients when we talk about Mexico it seems that all of a sudden Mexico is at risk. All of a sudden Mexico is slowing down. But, of course, the reality is-- economically speaking-- it's been slowing down for a few years here, right? And I think part of that is somewhat of a disappointment, in terms of the dividends and the reforms that have been implemented so far have actually paid in terms of economic growth, right?

That was a reason, for example, that Standard & Poor's last year put Mexico on a downgrade watch. For example, was saying, look these reforms are really not filtering through to actually better economic growth. And so I think the risks of the reforms, of course it's going to matter what happens with the elections, what happens with Trump.

But I think actually the biggest risk is that all of the reform enthusiasm around Mexico perhaps has never actually materialized, in terms of growth, in terms of earnings. And hence, why when people were paying a 20 time multiple for Mexico was on the promise of reform, which ended up not quite showing through in terms of dividends. So for Mexico's potential growth, we still think it's only around 2 and 1/2%. So, again, a slightly aging population, as well as the reform dividends not really showing up in terms of productivity growth.


GABRIELA D. SANTOS: Not to sound too negative. That sounded very depressing.

MARIA DEL PILAR AMADOR: So to change to the positive perspectives, you mentioned your preferred Brazil. So can you please talk to us about your perspectives and your outlook on this country?

GABRIELA D. SANTOS: So for Brazil-- as I mentioned a little bit earlier-- it's not necessarily a story about a huge return to growth. We do think that we'll end up with GDP between zero/ zero and a half. But really the opportunity is around the normalization of monetary policy, right? So finally inflation is coming down in Brazil. Finally, we're seeing some anchor inflation expectations around 4 and 1/2%.

And so we think really [INAUDIBLE] can engage in a much more aggressive easing cycle. We'll think we can get to 9 and 1/2% on the [INAUDIBLE] rate from 14.25% just last year. So that's a huge, huge move downwards, which can be such a great help across the board for companies in terms of better earnings growth.

And even thinking about next year, again, a normalization of growth. And a continued move down in interest rates to much more, let's say, normal levels, even if we just look around Latin America. And so the opportunity for Brazil there, I think, this is interesting. But it's not dependent on a huge surge in economic growth. Just a normalization of growth, as well as a huge upsight coming from lower interest rates.

MARIA DEL PILAR AMADOR: And, Verena, which will be your perspective for Brazil?

VERENA E. WACHNITZ: I mean, I agree. I think the recovery will start relatively slowly. So I don't have a forecast, but I would, in general, agree with the range that Gabriela mentioned. And, in general, I don't think potential GDP growth in Brazil is that high unless, they do further reforms.

But I think there are-- I am very positive on the reforms that are currently being negotiated in Congress. I think for the first time in ever there is some consensus that Brazil needs to address its fiscal imbalance. And especially that Social Security issue, which is probably-- at least partially-- going to be addressed by the reform, by the pension reform.

So I think this-- it's a unique opportunity for Brazil to solve this issue. And that opens the path for interest rates to be lower in real terms in the long run, and not just cyclically lower because inflation is coming down. And that's a very powerful driver for evaluations for Brazilian equities.

So I am quite positive on Brazil. I think we need to be aware that earnings are not going to surprise us on the upset anytime soon. But I think, as we look into next year, the outlook is quite constructive. And we just have to hope that the election-- again, the presidential election next year-- goes well.

I think if the economy starts to do better and people's expectations-- we already seen confidence numbers improving. Then we have a chance of having a more friendly outcome. And then we could be in a more prolonged positive environment for Brazil.

MARIA DEL PILAR AMADOR: So you think that probably this market move that we saw during 2016 is justified?

VERENA E. WACHNITZ: I think we just came from such a low level. And if you think-- the market, there's really a risk off trade, to a large extent. We still might-- a year ago from now I was in Brazil with some colleagues. And I remember the mood was so, so pessimistic. At that time, country risk for Brazil was over 500 basis points. Now it's, again, below 300.

So it was a very, very bad situation. Because Dilma in place, she wouldn't have done the adjustment. And Brazil was -- is still-- if they don't do the fiscal reform-- a fiscal time bomb. And we know how that usually ends, right? So I think the move-- as a risk of move and a change in expectations-- is very much warranted. And if you look at evaluations of companies, if you normalize earnings, I don't think they are absurd at all. So, yeah, that's my thought.

MARIA DEL PILAR AMADOR: Thank you. Even though we see these good perspectives in terms of growth and all that we have just discussed, Brazil has moved towards privatization of infrastructure projects. There in opportunities investors here around this infrastructure projects? Or do you think that probably opportunities are elsewhere?



VERENA E. WACHNITZ: I think infrastructure is interesting. If you think of some of the companies and their utilities in the energy space, some of the companies-- toll roads, airports, et cetera. I think they are going to finally have decent returns for their investments. And that's very positive.

And these are also companies that are going to benefit from a lower cost of capital for those investments. So the outlook is positive. I wouldn't say it would be my top choice, maybe, given how the capital markets or equity markets are in Brazil. There are really various sectors that you can choose from.

I think infrastructure should definitely be on everyone's short list, but it's one of many. I think financials is still an interesting area in Brazil. Real estate benefits a lot from lower interest rates. If you think of the-- it just means how can you manage real estate with 50%-- almost 50% rates? It's just absurd. So [INAUDIBLE] rates is great for that sector as well.

I think the consumer is still very depressed. It will take time to recover. But there are some really good companies in that area in Brazil. And then there's these areas that are benefiting from more market-friendly regulation and reform. And that includes even companies-- energy companies, for example. Telcos, utilities, companies that maybe are not as growthy usually. But they are benefiting from more favorable regulation.

And that could be an area of opportunity as well. So I think many areas of opportunities. Infrastructure probably one of them as well.

MARIA DEL PILAR AMADOR: Thank you. If we switch to the smaller countries-- Gabriela, I would like to address this question for you-- are you seeing any compelling opportunities in the smallest countries of the region?

GABRIELA D. SANTOS: So I would say in terms of the most exciting one going forward we would say is actually Chile. So Chile of course has been suffering in terms of low confidence, both on the consumer and the business side over the past few years with the new government. And wasn't quite a part of the wave of reform, let's say, last year. But could very well be doing so this year with the elections later on in the year, unless something changes, right, in terms of the polls?

The evaluations in Chile are still quite interesting. And if you do see that move towards what one could say a more business friendly government, again, in Chile that could be an interesting re-rating opportunity. And could also lead to some better confidence domestically, which would feed into growth and would feed into consumer names, for example, in Chile. So I think that's the next reform market, let's say, if we want to think of it that way, that has lagged behind over the past couple of years.

MARIA DEL PILAR AMADOR: And, Luis, you are a likely investor for two different countries. Do you feel like political risk is increasing? How do you incorporate within your investment process political risks as a local investor?

LUIS YANCE: Sure. I mean, when you look at the region I sort of see two or three trends within the political system. You have the countries that try or tested the waters of populism and went more left wing. Some of the things worked initially, so they were happy about it. Then you suffered the consequences. But you're now moving towards more orthodox policies, moving into the reforms.

We've talk about those. You know, that's Brazil or maybe Argentina in that camp, and to certain extent Chile, right? Chile wasn't as damaging as some of the other two. But it's had-- you know, went to populist policies. Now it's sort of back-- as Gabriela mentioned-- potentially to a business friendly government. So that's one camp.

The other is similar I say. But it hasn't done anything. I mean, it tasted of those waters and it seems like it likes it. You know, like the Venezuelans of the world. And at some point, you know, they will realize that it's heading the wrong direction.

At some point there will be a change, but we don't see compelling signs now that tells us that there is political change coming into those. So those say there. And then, I think, where the risk might be-- because the other-- the Argentina's and the Brazilians of the world, I think the political side is moving in the right direction.

Whereas the risk I see is for the countries that did not taste those waters, which is Colombia and Mexico to a certain extent. I mean, those are two of the largest economies in the region that never went to the left. And we are at a point where the risk is not necessarily too high, but it's higher than it's been over the past few years. Especially because the current governments are quite unpopular. I think it's a bit higher in Mexico, clearly, than it is in Colombia to go to the left.

But in Colombia you have a new process where now you have a guerrilla force that is being re-incorporated in society. How is that going to play with politics? We don't know. But I think Mexico is a real challenge. For a lot of years we've been-- dismissed the left. Now we see the polls and they're number one.

I mean, there's still a long way to go. But I think that could upset what goes on. So how do we incorporate that? it's tough. It's very difficult. And I think-- as Verena mentioned-- you know, what you want to do is at the streams perhaps think about whether there's change coming.

Typically, from an investor standpoint, you think about good changes, right? Like Argentina the bottom, is this the bottom? Brazil at the bottom is this the bottom? Now if you think about Mexico, is this the top? And then we're heading in the opposite direction.

And the problem in countries like Mexico-- and to a certain extent in Columbia-- is if we do elect that person, you know, we're stuck with that person for six years. So it's a long process, not a one time thing. So you've got to take it into consideration. But it's-- I would say from an investment standpoint-- it's difficult to bet on those things or to position portfolio.

I think we learned a hard lesson last year. How do we position against Brexit? Oh, it's not going to happen. Boom. How do we position against Trump? It's not going to happen. Boom.

How do we position against AMLO getting elected? I wouldn't say it's not going to happen. It could happen. You just have to be sort of neutral, I guess. What if it happens?

And the way we started thinking, let's say, in Mexico is what if he gets elected? And we've changed the mindset. You ask a Mexican a couple of months ago they would say, no, he's not going to get elected.

Now you say, well, what if he gets elected? What things could he do? Which companies he might be more aligned than others? Which companies could suffer less from him? Or maybe he's not as bad as people think. So you've started to change that conversation.

But that's a conversation-- as an investor-- you need to have to at least monitor the risk. I'm not-- I don't know if he's going to be elected or not, but I have to be prepared if he is elected.

MARIA DEL PILAR AMADOR: Would you like to comment?

VERENA E. WACHNITZ: No, I think on AMLO I agree it's a big risk. But if there-- at some point there's a point where the market is convinced that he will win and that he will be terrible, then that means everything's in the press. And that was Brazil a year ago, right?

I don't think we're there for Mexico. But if we ever get there, that might be an opportunity. Because some of these reforms that were approved by the current administration are constitutional reforms that require a super-majority to pass. And no matter by how much AMLO wins, he will not have majority in Congress. So I think there is some degree of limit to the damage that he can make But it would be-- yeah, it would be very bad for sentiment to the extent that the market has to price in that there will be left-wing populist in charge for six years.

MARIA DEL PILAR AMADOR: Interesting. I would like to address that very trend topic, corporate governance. How do you incorporate corporate governance within your investment process? How do you take into account whenever you select that company? Is this different regarding that country that you are looking at, or is it something that is the same standard for all type of company or origins of the companies? I will probably start with you, Luis.

LUIS YANCE: Sure. I mean, you know, when we look at corporate governance, I mean, there's an old saying that says that corporate governance doesn't matter until it matters. And when it matters, it's all that matters, right? So-- and that's how we see things in corporate governance. Especially Latin America where you go through those case-- waves of things are good. But when things are bad then all the bad things just start coming out, you know, corruption cases, et cetera.

And in particular for us, when we invest in a lot of mid-cap, small cap, micro-cap companies, those companies are relatively new to the markets. They probably don't have the same kind of disclosure you-- they have a lot of related party conflicts. So we really put it into the process more as a black or white. You either have it or not.

The companies where we feel like are shaky or have some serious doubts about it, we try not to invest in those. And because we expanded our investable universe beyond the typical companies that are part of the index, that gives us the flexibility to say, you know, if I have a much bigger investable universe-- because I'm looking at everything that is listed-- companies that may not have the best standards in terms of corporate governance, you know, we could stay away from those.

And I think there's a bigger addressable market out there. So I think you have to include it, especially for small and mid-cap companies. I mean, sometimes you waste time. You feel like you're wasting time thinking about those things.

But when things get bad, that's when things started to come out. I think it's the same for companies. When growth is good, every company will grow. When things are bad, then you start finding out that not all companies are created equal.

The same thing would apply to corporate governance. Not all corporate governance is created equal. When things are good, everything seems fine. But then those sort of things come out and get you eventually. So I think it is quite important for us. It's a critical part of the investment process. And we just don't go beyond if we have doubts about it.

MARIA DEL PILAR AMADOR: And what about you, Verena.

VERENA E. WACHNITZ: It's very similar. It's a filter. If you don't make the corporate governance standards, I think-- no, I don't have to invest in that company. There are many attractive opportunities in the region. If-- when in doubt, stay away.

And I think over time we've had many cases in LatAm in avoiding the mines. And the mines, a lot of times, have to do with corporate governance. It's a big time part of alpha generation over time. So I think it's very important.

I guess the only exception would be a case where corporate governance is significantly improving. Because then you can get-- there can be part of an investment [? thesis. ?] But there has to be a firm commitment to improve corporate governance.

So some of-- for example, a more recent example would be some of the state owned companies in Brazil where there has been-- with the [INAUDIBLE] administration-- significant changes in management, in the board. And the companies have regained independence over their own decision making. And that, over time, could lead to better returns and better capital allocation, less corruption.

So in those cases where corporate governance is improving and trending in the right direction, the starting point might not be what you ideally want. But those are the only exceptions. Other than that, I think staying away is the safest bet.

MARIA DEL PILAR AMADOR: And having what we have seen recently in Latin America and all the corruption scandals, do you have any concerns about corporate governance in the region not improving but the other way around. Or maybe just showing things that are being more visible now?

VERENA E. WACHNITZ: I think you always want to be careful with companies that have contracts with the government. And just be skeptical, ask a lot of questions, apply an evaluation cushion, you know, the usual practices. I think what's really good-- in terms of corruption-- is what's happening in Brazil. It's a risk-- the car wash investigation, the corruptions.

It's a risk because pretty much everyone is involved. And if something were to come up against the current president, then that could probably not derail forever, delay the reforms and could be very negative. But in the long run, it's great. It's great. Finally. Finally.

So much wealth has been destroyed in Latin America and Brazil, specifically-- is the corruption. And finally see that people are behind bars. It's amazing. So I really feel very happy for Brazil.

MARIA DEL PILAR AMADOR: Great. I'm going to take two questions from the audience. And the first one is for Verena and for Luis. And this has to do with company size, with market cap. Does market cap impact your investment process, or specifically for LatAm firms, obviously.

LUIS YANCE: I mean, it does. But at the end I would say, in a sense, that the way we try to do things is look at companies regardless of size, regardless of sectors, regardless of whether they're part of the index or not. And look for good opportunities. And so market size doesn't matter at that point.

But once we come up with the decision and this is the kind of company we want investing, this is the kind of company we see a lot of potential. As we build the portfolio, market cap considerations fit in. So for the same amount of off-side, same amount of downside. If it's a large cap versus a small cap, maybe we'll go with a higher percentage on a large cap because it's more liquid, there's more information, et cetera than with a small cap.

But it's more on the calibration side as opposed to, oh, I'm going to look at the large caps first, then the small. Because then if I have time-- the micro caps. No, we try to see what's available out there, what's interesting out there regardless of market cap. And then we sort of calibrate.

I think where market cap matters is it goes back to the previous question. Typically, the smaller the company, the less disclosure, more related party, less management expertise. There's a succession plan issue. Sometimes big companies it doesn't matter if the CEO goes, there's a guy there. But as some of those small companies are family-- generations of family-- if the guy leaves, who's going to lead?

So I think that's where you just have to be more diligent. You may have to have a bigger evaluation cushion in some of those. Because, you know, on the bad market as some small caps disappear. But I think in terms of starting to look at them, no it doesn't matter.

MARIA DEL PILAR AMADOR: Is this any different for you, Verena?

VERENA E. WACHNITZ: I have a bit more restrictions sometimes, just because I manage a fund of a certain size and I need to make sure that if I need to sell out it won't take me a year, right? So there is some restrictions from that perspective.

But beyond that point, it's very similar to what Luis was saying. It has to do with the level of conviction that you require. The more down of the cap scale you go, the more conviction you need to have, because the more you have to trust the company. You ask for an evaluation cushion potentially.

But it's a really interesting space, because a lot of these companies have tremendous growth opportunities that some of the large caps-- just because of the base that they are in-- don't have. So if you choose the right ones, I think it is an area of tremendous opportunity.

MARIA DEL PILAR AMADOR: Thank you. And our last question goes for Gabriela. Is it possible to say that there is this historical counter-trend between Mexico and Argentina? Having these days Macri in Argentina and Trump in the US, is it time to say-- to be long under Argentina and short Mexico?

GABRIELA D. SANTOS: I think-- if I'm getting at the right part of the question-- I think it's about the direction that the country is moving in, right? And certainly the leader of the country-- especially when it comes to LatAm matters a lot.

So we've had for so many years, right, when we thought about emerging markets we wanted not too much to do with Latin America for a little while there given the relationship with China and commodities and the potential for currency depreciation, except Mexico, right? Because you had that great link with the US that gave you a buffer and that protected you. And I think, unfortunately things-- the scale-- the pendulum is shifting to the other side, right?

Where, in our view, we feel that there is a lot more potential perhaps in other countries of the region where you are starting to see some stabilization in these external variables, where you are seeing the change in leadership. And finally, you're starting to see some more heterodox economic models, whereas Mexico is still a bit pressured given that US link, which is now a negative rather than a positive. So it's a shifting of the guards, let's say, compared to the past few years.

MARIA DEL PILAR AMADOR: Well, thank you. This has been a very interesting conversation. Thank you for the audience for all the questions you have already sent. For the moment, this will end our panel. Thank you very much.


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