SPECIAL REPORT: Finance in the age of COVID
Wealth management is about making educated guesses and holding convictions. In the COVID-19 age those calculations take on additional weight as the level of unknown unknowns increases.
by Charles newbery
When the novel coronavirus spread to Latin America in March, investors shuddered as economies went on lockdown. The S&P Latin America 40, an index of leading stocks, plunged 46%. With global markets in shambles and interest rates low, money managers scurried to review, fine-tune and even rethink their strategies for investors in and from Latin America.
This is the first global financial crisis since the 2007-09 Great Recession, and some managers quickly drew parallels. Would the markets again rebound relatively quickly? Or would the world enter a “new normal” of sweeping changes in how societies consume, live and work, thereby changing how and in what they invest?
The questions are still unanswered as the pandemic drags on and fears of a second wave surface, forcing managers to find strategies to safeguard wealth and find opportunities for growth.
Latin Americans may be old hands at managing wealth in crises — a recent deep recession in Brazil, yet another debt default in Argentina, bloody protests in Chile. But this time, it is global. Fly to quality? A lot did, but with the markets roiling just about everywhere, managers had to find assets that would not only sustain value, but benefit from an eventual rebound.
“It’s a little harsh, but you never want to waste a good crisis”
Ed Kuczma, portfolio manager, Latin American equity funds, BlackRock
Ed Kuczma, a portfolio manager for Latin American equity funds at BlackRock in New York, sold holdings in financially stressed companies during the selloff in March on concerns that a rise in borrowing costs and tighter access to credit could slash profits. He shifted to exporters, whose dollar revenue would shield them from local currency depreciation and allow them to benefit from a recovery in the global economy driving up demand for Latin America’s wealth of commodities. He also sold some of his best stocks to boost cash liquidity – “It always helps to keep some dry powder for when things do start to clear,” he says – and spoke with management teams to find out which have the experience and adroitness to not only pull through the crisis, but come out stronger.
“It’s a little harsh, but you never want to waste a good crisis,” he says.
E-commerce companies have benefited as more people shop online, while software developers have seen a surge in demand for programming to run businesses from home. Airlines have been hit hard from the travel restrictions, but the best-run ones could capitalize on the recovery in traffic after the pandemic. Banks, on the other hand, could suffer from a rise in non-performing loans as the region's economy shrinks by an expected 9.4% this year, the worst since World War II, and recovers at a meager 3.7% in 2021, according to the International Monetary Fund.
Fabio Alperowitch, founder and fund portfolio manager of FAMA Investimentos in São Paulo, says he boosted his stake in Notre Dame Intermédica and other Brazilian health insurers. The reasons? The COVID-19 crisis has reduced doctor’s visits and accelerated the use of telemedicine, meaning insurers are dishing out less, boosting productivity and trimming costs.
Alperowitch boosted his positions in large companies he expects to pull out of the pandemic even stronger. Banks have reined in lending during the crisis to only the most creditworthy companies, leaving smaller companies exposed to getting bought out by their bigger rivals, he says.
A QUICK REBOUND?
The markets tend to price in a recovery before it starts as investors look past the crisis. Indeed, the S&P Latin America 40 recovered more than a third of its losses from the selloff by the middle of June.
Quick rebounds in Brazil and Mexico suggest that despite their laissez faire approach to fighting the virus — they have among the highest death tolls in the world, their economies could pull out faster than those with stricter lockdowns like Argentina, Chile, Colombia and Peru, says Scott Piper, head of Latin American equities at Itaú Asset Management in New York. The more extensive the lockdown, the worse the economic malaise and the longer the recovery, he says.
Regardless, the region has benefited from a strong tailwind. The vast stimulus spending in developed countries — four times more than in the Great Recession — has unleashed a “flood of money,” Piper says. Of this, some is flowing into Latin America as investors look for higher yields on the forecast of a weak US dollar and a long period of low interest rates and inflation in the developed world.
THE LAST PATIENT
There are risks. Large fiscal deficits, rising debt-to-GDP ratios, and high rates of labor informality, poverty and unemployment, plus low financial inclusion and a large education gap, mean Latin America likely will struggle to provide the stimulus for rekindling growth, let alone support the hospital infrastructure needed to contend with COVID-19.
“Latin America is probably one of the last regions to enter this pandemic, and it will probably be one of the last to come out of it,” Kuczma says.
The health crisis, he warns, could widen economic disparity to flame new protests like those late last year in Chile and elsewhere. Low-income people come out weaker and with dimmer prospects, holding back corporate growth.
“Will they have enough liquidity to weather the storm for the next three, six or 12 months?”
Luis Arango, head of international wealth management, SunTrust Private Wealth Management
Key to managing wealth through this is to keep close tabs on investments, says Edgardo Sternberg, co-manager of emerging markets debt portfolios at Loomis, Sayles & Company in Boston.
He says that Latin America should rebound relatively quickly from the pandemic, tracking China’s brisk pullout in six to eight weeks.
“We can probably go through the same thing with a horrible drawdown in terms of returns, but then it should come back up quite, quite fast,” he says.
Sternberg is focusing on what companies are prepared for the recovery in terms of manageable debt levels and sufficient liquidity.
DIVERSIFICATION
Are Latin Americans buying these strategies for managing their wealth? In part, yes. At FAMA, Alperowitch says some investors have stepped up, even doubled, their investments in his Brazilian equity fund to bet on the rebound.
Yet the crisis has also put a renewed focus on diversification. Lars Jensen, head of Americas International at Legg Mason Global Asset Management in Miami, says more investors are putting money in hedge funds, with the flexibility and skills to protect wealth from negative returns as interest rates run so low around the world. A sharp decline in Brazil’s benchmark Selic rate to 2.25% from 14.25% in 2016, for example, has pushed investors there out of fixed income and into equity and other alternatives with higher yields, including international markets. “There is a real need for them to diversify,” Jensen says.
Other investors, in particular business owners, want cash, says Luis Arango, head of international wealth management at SunTrust Private Wealth Management in Miami. “The majority of them are concerned about what the long-lasting impacts of the pandemic will be,” he says. “Will they have enough liquidity to weather the storm for the next three, six or 12 months?”
Sergio Kokubo and Artur Ferreira, financial advisors at UBS International in New York are seeing the same with their high-net-worth clients.
“When you have a big movement in the market, you always have a big risk and you always have great opportunities,” Kokubo says. “They're all looking for the great opportunities.”
The search, however, is less on the savings side, and more on the business side, he says. Business owners are looking to take advantage of low interest rates in much of the region to borrow and then buy distressed competitors for expansion. There is always, however, extreme caution because of the uncertainty about how the pandemic could affect the future of businesses and consumer demand, public finances, policies and taxes, Kokubo says.
With their savings, ultra-diversification is gaining as a strategy to protect and grow portfolios, from reducing local exposure and boosting holdings in Asia, Europe and the United States, to stepping up private equity and even art, he adds. To figure out what to put money in, investors are asking everything from the impact of the pandemic on public finances and currencies, to the swings in geopolitics and whether economies will emerge with inflation or deflation. So, when it comes to buying real estate, for example, it is not just about boosting holdings in that asset class, but in what type and where, says Kokubo.
“They are taking a look at every single opportunity,” he says. “Even if they had a balanced portfolio of fixed income, equity and alternative investments and different currencies, now they are going even further in their analysis to find new opportunities.”
Playing it cool is another strategy. “We think that the best way of managing money is not reacting to what's happening right now, but really trying to think what might happen a few months down the road and being prepared for it and always having a plan B,” says Ferreira. “What if I'm wrong? What are the main drivers of our rationale? Should we change? Were we wrong? Doing those checks during the journey are very important.”