Opalesque Roundtable Series - Brazil 2012
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After 2008 and 2010, this is the third Opalesque Roundtable we are publishing about Brazil. Coming back after two years, I was amazed how the markets and the financial industry have marched along and achieved true progress, to the benefit of all Brazilians and investors.
The number of strategies offered by the local alternative investment managers continues to grow. The firms which participated in our small Roundtable, held in March at a local Citi office in Ipanema, are running equity long/short, activist, credit, macro, quantitative, real estate and private equity funds. You will also find CTAs operating out of Brazil.
Today, more instruments than ever are available to the local managers. They come in acronyms like REIT, but there are also FIPs, LCAs, LCIs, CRIs, FIDICS: all these instruments are starting to gain sophistication and also create arbitrage opportunities for the professionals on the ground who understand mispricing of an instrument related to its comparables.
On the macro level, the creditworthiness of Brazil is probably in its best position in at least 40 years – debt to GDP ratio has come down all the way from over 60% to around 36%-38%.
What will drive the performance of Brazilian markets going forward?
At a certain point, large inflows from retail and institutional Brazilian investors are expected to go into the listed equity markets. Fore example, only 15% of retail investors with US$100,000 to invest have money in funds. From these 15%, only 9% invest in equity funds. The average allocation of Brazilian pension funds to equity is 18%; but if you leave out the largest two, Petros and Previ, the number comes down to about 12-13%.
Brazil has still attractive multiples and also better liquidity compared to other Latin American markets like Chile or Mexico. Brazil's PE is between 9 and 10 while Chile is at 15 or 17, depending on the day, and Mexico is close to 14.
The listed equity market has still huge growth potential. Right now, only around 400 firms are listed companies (100 of those are basically shell companies and therefore not investable), whereas over 30,000 companies could eventually be listed.
Brazilian enterprises that have never tapped the capital markets before now have easy access to the local credit markets and issue relevant amounts at very low spreads. That has a direct impact on the equity market, because these companies can now raise capital not by using the owner’s money, the equity, but by using third parties' money, which works as a significant leverage for the equity part of the balance sheet of the company.
Regulations are extremely investor-friendly, as hedge funds in Brazil are regulated by the same set of regulations as the local mutual funds . That has broad implications for investors. For instance, transparency and corporate governance are in general much better than with offshore hedge funds. All pricing is done by an independent administrator, who will apply the same price for the same securities across all the funds from different managers that are under their administration. This is in stark contrast to what happened in 2008 or 2009, where some managers were carrying GMAC bonds at cost or par, while others had marked them down to zero; and between zero and par, you could find all sorts of marks even within the same administrator.
Margin requirements are set by CBLC rather than by the prime brokers. That means that two market participants having the exact same portfolio will have identical margin requirements. The margin does not depend on their commercial relationship with the broker.
The market infrastructure is changing fast. For example, over the last three years, several high frequency trading firms started to enter Brazil and are now adding liquidity to the local listed derivatives market. UBS’ acquisition of the Brazilian brokerage firm Link Investimentos raised eyebrows in April 2010. Today, several major vendors like Trading Technologies and Equinix (through its acquisition of the Brazilian technology firm Alog) now provide access to exchanges and trading platforms.
The Opalesque 2012 Brazil Roundtable was sponsored by Citi and Eurex and included the following participants:
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