Investing In Latin America: It’s Not Only About Brazil
Jan 21 2011 | 10:52am ET
Ask fixed-income specialist Ray Zucaro of SW Asset Management what interests him in Latin America and he’ll say “protein.”
Zucaro isn’t a dietitian, he’s interested in protein because as emerging markets emerge, citizens acquire more disposable income and “If you look at historical consumption patterns, typically two things happen: first they eat better, and then they buy a cell phone.”Eating better means more protein, and when it comes to supplying that protein, Zucaro says Latin America is in the catbird seat:
“The region as a whole, Latin America from Mexico down, has been pretty much blessed with natural resources, everything from oil and iron ore [to], more importantly, water and growing cycles, which is very important for sugar cane, soy beans, beef, chicken, pork—the protein consumption.”
California-based SW Asset Management is a fixed-income specialist, so it gains exposure to the protein sector by “buy[ing] debt of companies that will benefit from increased production, increased pricing, better efficiencies...We focus on fixed income, and fixed income in emerging markets.”
Zucaro himself has focused on emerging markets for his entire career, from his beginnings as a corporate analyst at Americas Trust Bank to his current position as managing director and portfolio manager at SW. And among the emerging markets of Latin America, Zucaro has some favorites—and some concerns.
Take Brazil, for example. Says Zucaro, “Our concern ... is that everyone loves Brazil,” particularly in the fixed-income space:
“If you look at the BRICs, India doesn’t really have a fixed-income market; China, again, the state lending machine doesn’t really facilitate the needs of fixed-income capital; Russia still has the stigma holding over from the Soviet Union; so when the fixed-income investor wants exposure to the BRICs, Brazil is the easy trade. So, our concern is that [in] Brazil, from a relative perspective...compared even, perhaps, to other emerging markets in the region, valuations have gotten a little ahead of themselves.”
In response, SW is “playing the Latin American story through some of the peripheral countries—countries like Argentina, Venezuela, Mexico—where we see a lot of opportunity and frankly, we don’t see the same amount of focus from international investors as we see in Brazil right now.”
Elsewhere in the region, Zucaro says he likes Colombia and Peru “a lot.”
“If you look at the economic cycle, they’re definitely on the upswing, the problem for me as a fixed-income investor [is that] the investment selection is not as deep as I would like... I think the countries are poised politically. Economically, their fiscal houses are very solid. The political succession in Colombia is very good. It’s sort of the opposite of Mexico, they’re coming out of their violent period. But for me, I wish I could find more things to invest in.”And speaking of the violence in Mexico, Zucaro says it’s the kind of macro factor investors looking at emerging markets must always consider:
“When you invest in emerging markets, especially on the corporate side or the equity side, it’s really a two-prong investment. You have to understand what’s going on in a country. [On] the macro side, you have to get that call correct, and then when you make an investment, from the fixed-income or equity side, you have to understand the company and the driver of that company. …So, are we concerned about Chavez being—what’s the diplomatic or politically correct way to say it?—a flamboyant leader? Sure. Are we concerned about violence in Mexico impacting GDP? Of course. Last week we were in Mexico and that was one of our biggest concerns, how was the economy in Mexico being affected by violence.”
The answer, he says, is to “do a lot of work...focus a lot, and try to position ourselves to benefit.”
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Zucaro speaks Spanish and Portuguese, which is an asset in doing the sort of work mentioned above. Although contracts are generally written in English and jurisdiction over them is usually in New York, it “certainly helps” to speak the language, he says.
There’s a “personal nature of doing business in Latin America or really, frankly, any emerging market, [so] being able to speak to the end investor, the end provider of capital in their own language is certainly helpful.”
Ray Zucaro will be speaking at The Search For Alpha In Latin America, which takes place on Feb. 16 in Miami.
