With the football World Cup and the Olympics coming over the next five years, Brazil has emerged as a major player on the world stage. And although its economy has stuttered somewhat in recent years, the country remains firmly in the focus of global players.
With the football World Cup and the Olympics coming over the next five years, Brazil has emerged as a major player on the world stage. And although its economy has stuttered somewhat in recent years, the country remains firmly in the focus of global players.
High commodity prices over the past couple of years have kept Brazil going, as exports rise. Meanwhile the country’s government has been lauded for using inflows of capital to set up the country’s base - debts have been repaid, and investment has been made into the infrastructure. Reforms are undoubtedly still required, but most analysts believe Brazil is on the right track.
This growth has been mirrored by the equity markets. While Brazil was by no means immune from the cold the world caught, when compared to either its Latin American, BRIC or Western counterparts, the damage that was done was minor. The markets took a bit of a hit - 2010 was down about four per cent - and investment into the country has fallen. But the fact that most investors retain their confidence in the market shows how far the country has come.
“We’ve never been the basket case economy that some of our neighbours have had the reputation for,” says one insider. “But in previous global recessions, investors have taken their money out of Brazil because they wanted to put it in a safe haven. Now, I feel, investors are taking their assets from other countries and putting them into Brazil because they have the confidence that growth will continue.”
Previous financial crises saw Brazil stare into the abyss. The country faced real problems during the recessions in the 1970s and 1980s, but so far it’s holding firm. Economic policies directed at stimulating consumer spending, institutional investment in infrastructures such as funds, the aggressive policy of retail credit and reduced taxes for a short period of time, have probably been the vehicles that assisted Brazil in weathering the financial storm and encouraged confidence in the Brazilian market.
In the first part of 2009, some foreign investors did pull out of Brazil, leading to a fall in the value of the Real. But most investors stood their ground, and GDP was forecast at six per cent for 2010. The Real has since risen in value, gaining 40 per cent on the US dollar. At times the Bovespa saw a drop of up to 25 per cent, but this has been mostly made up, and investors are once again flocking to the market.
These investors are made up of both local and international players. Brazil has a number of large pension funds active in the market, as well as a growing middle class who want to save. It also has a number of very high net worth individuals, many of whom like to keep a significant part of their wealth within their country. At the moment, there are over 350 pension plans in Brazil, with assets equivalent to about 11 per cent of the country’s GDP. And this is set to grow - of Brazil’s growing middle class, at least 3 million still have no provision for their retirement, and there are major initiatives in place by the government to encourage its citizens to start saving.
International exposure comes from the large numbers of emerging markets funds who have seen their values remain relatively stable while the less risky domestic funds have fallen by the wayside. While many emerging market funds retain a focus on Asia, Brazil is seen as a strong contender for long term growth. There are also a rising number of funds concentrating solely on the Brazilian market, while the hedge fund industry is beginning to wake from its slumber and look once more at a country where huge construction projects for the sporting events are keeping the economy on track.
The players
The custody landscape is made up of a mix of domestic and international players. Spanish and Portuguese banks have historically had a major foothold in the market, and Santander and BBVA are still serious players. Domestically, Itau Unibanco has a significant market share. Deutsche Bank, HSBC and the big US banks all offer services, while BNP Paribas launched a custody service in the country in 2010. The French bank, which has had an office in Brazil for 60 years, has high hopes for the market. With an initial team of 12, the bank expects fast growth.
Philippe Kerdoncuff, head of new market development at BNP Paribas Securities Services, said the company has been providing complimentary custody services to non-Brazilian clients for many years. However, the company believed it was time to launch an official service.
“It has always been a part of our local asset management business and a support of our fixed income and equities business. We felt that it was time to leverage upon these services and develop the offering officially. There is clear client demand for this,” said Kerdoncuff.
Competition is very tight and margins are low. “Brazil is a big market and it’s going to get bigger,” says one custodian. “But in terms of asset servicing, it’s already very mature. All the major players now have a footprint and we are all chasing the same business. There’s not a lot of room for manouvre.”
Regulation
No-one denies that operating in the Brazilian market can be a complex process. Until recently, Brazilian-domiciled funds were barred from investing capital overseas. But in 2008, the Comissao de Valores Mobiliarios (CVM), the Securities and Exchange Commission of Brazil, changed the rules. Now, international players with a presence in other markets are able to look beyond Brazil’s borders.
The CVM expanded the new rules in 2009 to allow pension funds to look overseas as well. This, say some of the global players, means that the domestic providers are in danger of being cut out of the market. “There are a lot of very good custodians in Brazil, and it’s fair to say that many of them offer the same quality of service across South America,” argues a representative from a major international bank. “But there’s a question about whether they can offer the same service to funds who are looking to invest in Asia or Europe.”
Outlook
There are few in the financial services industry who don’t believe that the Brazilian market is one to watch. The only question appears to be how quickly and how much it is going to grow by.
Unlike some of its neighbours - and itself, in the past - Brazil’s growth appears to be following the slow but steady path, meaning that fund managers are increasingly confident that the risks associated with Latin America over previous decades are now in the past.
But change is likely to take place over the coming years. The big global players are making Brazil their priority, which may mean some of the domestic players are squeezed out. Brazil is now a major global player, and it appears that the major global custodian banks will have the upper hand.
