Arriving in Santiago is a timely reminder of why emerging market investors are badly served by treating these regions as one amorphous group; Latin America differs markedly from Eastern Europe, which again is completely different to emerging Asia. Having worked for several days here, many of which were spent in the financial district, it's hard to tell the difference between this city and some of the European Capitals we visit regularly – stepping out between the skyscrapers I could just as easily be in Canary Wharf or La Defence in Paris.
In fact this is one of the things that people don't appreciate about Chile – many experts consider it a fully developed market rather than an emerging economy. It has been a democracy for about 25 years (just over a decade behind Spain) and has in the years since developed many of the characteristics which we would associate with a full liberal democracy. Its Central Bank acts independently of government with a mandate of keeping inflation in check (not something that we strongly associate with the region), and as a result it's base rate is at a very respectable 3%, compared to 12.75% in Brazil and 13% in Argentina. In other areas it exceeds western standards; its pensions framework stands in contrast to the sword of Damocles hanging over many European states, with a very well-funded system of employees having to put 10% of wages aside to cover their retirement.
At Tcam our focus is on delivering the right asset allocation for our investors, as this is the area where most returns are generated. It's therefore vital that we have a full understanding of what is steering markets around the world so that we can take advantage of inefficiencies and invest where we think particular asset classes are undervalued.
We have believed for some time that Latin American securities may be one such class – the market has overreacted in pulling money from the region, exaggerating the influence on the economy of falling oil and commodity prices, overemphasising political instability and under appreciating the region's ability to benefit from growth of the US economy.
This is the first in a series of blogs by Chief Investment Officer Haig Bathgate, as he tours South America to hone our investment thesis on the region, and find the drivers behind the main economies there.
At a macro level the country has been just as wise and forward thinking. Like many South American countries it has boomed in recent years due to demand for its natural resources – in this case the copper that it has exported to China. But like Norway (you can't really get more developed than mimicking Norway) it has set up sovereign wealth funds to help save for the future, and smooth the country's budget between plentiful and leaner times.
And lean times is one of the problems the country is facing at present. As China moves from an economy dependent on infrastructure investment to one where consumer spending is more important, Chile is facing slower demand for the metals in its mines. It's also facing some political ructions (moderate by regional standards) as its mildly left-leaning government, spurred on by deep inequality (its Gini coefficient, a measure of the difference in earnings between the lowest and highest paid, is about 0.51, compared with about 0.38 for the UK), attempts to redistribute some of the nation's wealth. But even here the intentions are laudable— the government wants to spend some of the increased tax revenue on boosting education to make the economy more sustainable for the long-term. The issue is that it is doing this just at the wrong time, with the Chinese slowdown already causing economic instability.
That said, all of these things are relative; the long-term growth rate for the country is predicted at 4-5%, something a European nation would long for, and corruption allegations against the country's leaders are nothing when compared to what has been going on elsewhere on the continent. The main thing militating against a strong investment here at present is its dependence on Asian growth, whereas we think there may be greater opportunities in those Latin American countries that can better ride the wave of a resurgent US.
Population: 17.6 million
GDP (2014): $258 billion
Per capita: $14,477
This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.