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Chinese Whispers: Rumours & Facts From the Third Plenum

The Third Plenum, a significant legislative function that brings together every member of the Central Committee to discuss major policy issues, has already been called “unprecedented” by Chinese officials. Investors remain skeptical, taking the cautious stance of awaiting more details of the meeting and its impact before making any decisions.

How Will Investors React?

China analysts are currently combing through the various resolutions adopted by the Plenum, looking for hints to any industries that might benefit from the next round of reforms. There will be various “market implications” reports from different brokerages (e.g. Chart 2), but considering the overall lack of any real surprises within the resolutions, many of the implications have already been priced into the markets, having become expensive, with valuations already outpacing earnings projections. We believe that eventually, when investors realize that even announced improvements will not occur overnight, prices will start dropping. Implicated investors will be caught in the old investment trap: “buy on rumor, sell on fact.”

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The Financial Sector Stands Out

Regardless of the angle the Party winds up taking with future reforms, we strongly believe that the financial sector will be the first to benefit. Without a healthy banking sector, the rest of China’s reform plans would be much more difficult to achieve. The Chinese government is expected to accelerate interest rate deregulation and facilitate the development of the fixed income market. Due to the success of Shanghai and other cities in issuing bonds last year, we expect to see a more sophisticated development of Chinese municipal bonds. In order to increase transparency, we believe the local governments will be required to release their own balance sheets before issuing their own bonds. This will substantially remove the overhang of high credit risk related to local government lending (aka LGFV risk) within the banking system. Additionally, banks will be able to free up their capital and increase lending to a higher margin of the SME segment at the expense of reducing exposure to the corporate/local government segment, which currently accounts for some 72.3% of total bank loans.

Furthermore, another important financial reform-oriented message was the intention to establish a government bond yield curve which will better reflect market supply and demand. This should imply a higher yield for RMB long-dated bonds, benefitting local insurance companies.

At current valuations, Chinese banks have priced in high credit cost for fear of LGFV risk and rising NPL. We believe the new government policy of allowing local governments to issue bonds will serve as a catalyst for a significant re-rating of China’s currently undervalued and under-owned banking sector. Other non-bank financials (e.g. insurance companies and brokers) should also benefit in view of anticipated development in the fixed income market.

Looking forward, we remain very positive on China’s investment outlook. The country offers an attractive GDP growth of over 7%; growth we believe to be sustainable given the positive messages from the Third Plenum. In addition, the lack of inflationary pressure (CPI is forecast to be 3.5% in 20143) and the development of fixed income markets should all benefit overall financial reform. There have been some signs pointing to the return of business confidence as per the PWC Asia Pacific 2013 CEO survey (see Chart 3) which shows that 68% of 478 Multinational Corporations are planning to increase their investment in Asia next year.

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Opinion column by Mansfield Mok, Portfolio Manager, New Capital China Equity Fund, EFG Asset Management

One Exchange for Them All

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Imagine one idea that strikes twice, simultaneously inspiring two entrepreneurs physically separated by 3,000 miles and the equator. The tenets of capitalism suggest that of these two, only one will succeed by providing the market with a better product at a more competitive price.

Now, assume that the first entrepreneur is based in Silicon Valley and the other in Costa Rica. The playing field is now uneven, and the significance of a solid business acumen and competence gives way to geographic fortune.

When compared to their Silicon Valley counterparts, Latin American entrepreneurs are faced with significant funding gaps. For investors, this represents a wide swath of untapped investment options. For business owners, it is a competitive disadvantage. Latin America lacks a single platform that bridges these funding gaps, and investors have traditionally struggled to build the critical mass needed to launch successful ventures. Often, the money dries up after initial sources of funding such as family, friends and local banks are exhausted.

The entrepreneurs of the region can look to a mainstay of the American economy for a bridge: the stock exchange. The various New York-based and international stock exchanges that have developed in the past 150 years have helped companies and investors alike by providing an equal playing field that facilitates growth through investment. Startups in Latin America can benefit from such an exchange, which would also allow for the funding of all properly-vetted projects, by evening out the playing field.

An exchange exclusively focused on startups and interested investors presents a solution to such problems. For Latin American firms trying to gain momentum, the biggest time suck is playing the dual roles of fundraiser and product-maker. Without a built-in Rolodex of venture capitalists (VC), founders can find themselves working a full-time job just to secure funding. An “exchange for them all” is an elegant, egalitarian solution that will disrupt this insular model of VC investment.

Other obstacles exist that conspire to keep Latin American startups from succeeding. Some are cultural, deeply embedded within nationalistic attitudes. Failing is a requisite in business, but failure can be a source of great shame in some Latin American circles. Also, for many people on the lower end of the socioeconomic scale, class barriers can prevent even the best of ideas from being realized.

This is why a startup stock exchange should incentivize investor participation by setting a low barrier for entry. A minimum of $100 is a reasonable amount to expect from investors, which allows for incremental investment.

From the investor’s perspective, the world of international startups can be a murky one. To navigate these opportunities, investors need a single platform in which to apply judgment, and a tool that undertakes the task of due diligence, which is indispensable to making wise investments. To this point, the marketplace has been void of a trading platform that solely focuses on startups and interested investors.

Investors want a clearer path. They want a vehicle that allows them to invest and divest as they see fit, following the traditional exchange marketplace model; a place where their shares appreciate in value as the companies they invest in show returns.

Investors also crave transparency. Too often, seemingly lucrative investments in foreign companies can come with unexpected roadblocks, regulatory and otherwise. There is no way to anticipate wild cards, such as local politics and rogue regulators, without a marketplace that accounts for them, conducting due diligence on behalf of the investor community and shining light on these potential potholes. There is a need for a place that enables trading startup shares with ease and confidence.

The best ideas and entrepreneurs in Latin America deserve a fair chance to either sink or swim. All that is missing is a clean pool.

Europe’s “Dash for Trash”

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Markets are acting in quite a complex way in Europe at present, being pushed higher more by people wanting to increase their weighting in Europe rather than any dramatic improvement in economic data. October and November thus far has seen some pretty strong gains for more cyclical areas of the market. There is a contradiction within the way markets are moving: what I think is potentially exaggerated optimism. Whilst economic news in Europe is marginally better and company news has generally been quite good, people are maybe getting a little ahead of themselves.

Overall, we anticipate a period of fairly low and volatile economic growth. We might get some quite good economic news, or some strong results, but then markets might get scared by renewed talk over tapering, a disappointing piece of data or inclement weather conditions, which could change people’s spending habits.

On the subject of results, the latest round of figures from LVMH and Heineken (neither of which we hold) were pretty weak. But results like this amongst other recognisable quality growth names have been a key reason behind the trend towards more cyclical names, in anticipation of a cyclical recovery that may, or may not, come through. There has been a bit of a ‘dash for trash’ in October and November and that is a part of the market in which we do not really participate. Nonetheless, whilst our long-term ‘quality growth’ investment style could be seen as a little unfashionable in this environment, we think the fund is reasonably well placed.

Tim Stevenson, manager of the Henderson Horizon Pan European Equity Fund

At Odds with a Free Market

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Just the other week I was in Hong Kong, which is an easy place to be in many regards. It’s efficient, lively and not at all bureaucratic. It is where I married my wife years ago, even though she is not from there and we were both living in South Korea at the time. Hong Kong is just a marvelously easy place to pursue happiness!

But this time, as I was waiting in the airport, I heard a chilling announcement over the loudspeaker system. Anyone caught trying to leave Hong Kong with more than a few kilograms of baby milk powder would be subject to a HK$500,000 fine (approximately US$65,000) or face imprisonment. What was this all about? Well, following a recent series of scandals over milk and milk formula quality in China, people have been desperate to buy quality brands. They have been willing to pay large premiums to secure high quality formula, and since much of this is available in Hong Kong, the baby formula market there has started to suffer shortages.

As consumers in Asia move into middle class lifestyles, they have begun to care more about the environment, social and safety issues.

Essentially, this is an issue of product quality. And there are several ways to deal with it. This may include tightening regulations surrounding product quality in China, which the country has been doing but with slow progress. Bureaucrats have lost their liberty and one even lost his life over such scandals. You could also seek to limit exports of the product from Hong Kong by deeming it “smuggling” and arresting people who break the new law—and this has been the choice of Hong Kong regulators. You could even try to clamp down on “profiteering” by those “high quality” producers who are enjoying premium pricing in China—and this has been the reaction of the mainland authorities. Or you could allow the free market to do its work. I suspect that this final approach to dealing with the issue would, over the long term, be the most powerful.

If there is money to be made by obsessive attention to quality, then firms will either improve the quality of their products or (in areas where they already lead the market) increase their production. Demand for better products generally increases brand value and customer loyalty. The pricing signals of the market are then reinforced by increased brand awareness. This all saves consumers the trouble of a panicked search for better product. And in the case of adulterated food products, that could mean saving lives.

It also seems to me that the actions of the authorities in Hong Kong and the mainland, whilst they may help with some short-term issues, are at odds with the long-term process of the market. After all, Hong Kong is preventing mainland consumers from getting the quality product they want in the quantities they desire. Meanwhile, mainland authorities are interfering with the price mechanism by which people can identify the best products and by which the manufacturers would be incentivized to supply more.

Ultimately though, it seems likely we’ll continue to see issues like this crop up. As consumers in Asia move into middle class lifestyles, they have begun to care more about the environment, social and safety issues. Those companies that can attain a reputation for quality, health and safety—be it in baby formula, fast food, preventative health care and the like should be able to add huge amounts of value to their firms and shareholders. After all, people are willing to risk hefty fines and going to jail to smuggle baby milk formula because the demand is so high. Just imagine the incentives if the market were allowed to work with fewer impediments.

Opinion column by Robert Horrocks, PhD, Chief Investment Officer – Matthews Asia

The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.

Shifting Sands

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“Risk-on, risk-off” may have been the leitmotif of 2011 and 2012 but there is no denying that 2013 has also seen an element of regime change, even though equity markets have broadly trended up.

For the first five months of this year, markets rode a liquidity-fuelled rally, binging on the generosity of the US and Japanese central banks. Punctuated by a small correction in early summer, equity markets resumed their upward trajectory, only this time on a wave of upbeat economic data until nervousness grew that this would encourage the US Federal Reserve (Fed) to taper (reduce) the asset purchases that form its quantitative easing (QE) programme. The Fed’s decision not to taper in September allowed markets to regain their positive momentum through September and October, in renewed faith that central banks would continue to provide cheap liquidity.

Yet for how long can Fed tapering remain out of the game? The Fed has been at pains to stress that any move towards less accommodative monetary policy will be data dependent, yet reading the economic runes has been made challenging by the government shutdown in October, which has muddied the economic data.

So while we remain strategically bullish on equities, we are not fully invested

The jump in non-farm payrolls from 163,000 for September (a figure that was revised up from an earlier reading of 148,000) to 204,000 for October was therefore not wholly unexpected. The Institute for Supply Management’s composite manufacturing and services survey held up, suggesting were it not for the government shutdown, jobs growth might have been stronger still. Gasoline prices in the US have also fallen back sharply: this acts as an automatic stabiliser in the US, effectively delivering the equivalent of a tax cut to US consumers.

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We remain constructive on the US economy. So, whilst we expect the pace of economic growth to slow in the fourth quarter, the outlook for 2014 is brighter. Consensus estimates are for gross domestic product growth of 2.6% and inflation to average 1.8% in 2014 (figures from Bloomberg, 11 November 2013). Assuming that the forthcoming fiscal negotiations are resolved constructively, fiscal drag should be significantly lower in 2014 than this year. The downbeat economic data, which has led to statistics surprising to the downside, might soon reverse. This could bring Fed tapering back as a story over the coming months.

We retain our preferences for the US and Japan

Beyond the US, however, the global picture is still patchy. Forecasts for global growth have stabilised in recent months, having been drifting lower earlier this year. In broad terms, upgrades to growth forecasts for Japan and the UK have offset the downgrades in the US. Estimates for growth in the eurozone and China have steadied but forecasts for the other emerging economies are still under pressure.

Whilst we can envisage the US economy reviving in the new year we are more sceptical about the eurozone. We see numerous impediments to growth, not least the ability of the eurozone to withstand the recent appreciation of the euro. It is difficult to believe that the cut in the European Central Bank’s policy rate to 0.25% was solely induced by undershooting inflation without a nod to demands for leniency from European exporters.

For now, markets seem prepared to chase equity markets higher, despite the anaemic economic outlook. While faith in policy and liquidity can allow equities to decouple from macroeconomic momentum in the short term, a decent economic recovery is ultimately needed to turn the current rally into something more sustainable.

So while we remain strategically bullish on equities, we are not fully invested. We think there will be better opportunities in the months to come to put cash to work. We retain our preferences for the US and Japan. Within fixed income we are underweight duration (sensitivity to changes in interest rates) because relatively low yields offer little in the way of potential capital upside but greater downside risk.

The new year brings a change of Fed chairman. Given that markets are so sensitive to liquidity there is plenty of newsflow that could test market nerves, particularly when the valuations of many asset classes look fairly rich. Growth is the only viable long-term substitute for liquidity – let’s hope for a smooth handover.

In the Wake of Disaster

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Siguiendo los pasos del desastre de Filipinas — Wikimedia CommonsShubert Ciencia. Nagacadan Rice Terraces (Kiangan, Ifugao). In the Wake of Disaster

As humanitarian organizations scrambled to send relief to the Philippines this week following the country’s battering by Typhoon Haiyan, foreign governments prepared to support the rebuilding and economists looked to assess the tragedy’s near-term impact.

The typhoon was a stark reminder that Asia has faced its share of extreme natural disasters—earthquakes, tsunamis, cyclones and volcanic eruptions to name a few. In fact, in just the past four years, the Philippines has been struck by five of the costliest storms in its history—amounting to a cumulative estimated US$2.4 billion in damages. While both terrifying and devastating for the country’s population, such natural disasters have been more limited in terms of their impact on the country’s economy. Estimated damages for the five prior storms amounted to less than 1% of this year’s GDP, in an economy that has grown approximately 12% annually in nominal U.S. dollar terms over the past decade.

While the extent of the toll of Haiyan is still unknown, the capital of Manila and its surroundings were largely spared. The hardest hit regions have been predominantly agricultural, and account for just 18% of GDP. That said, since food comprises a large percentage of the Philippines’s consumer price index (CPI), the CPI is likely to rise in the coming months.

This may also pose a short-term impact on inflation in other areas. Roads, ports and other infrastructure that will need to be rebuilt may create bottlenecks in the supply chain. But despite its recent high growth, the Philippines has maintained low single-digit inflation since 2010, so even a minor uptick should not have serious ramifications.

With the need for infrastructure even more critical now, the willingness and incentives for governments and private businesses to work together should be even higher. In the long run, the infrastructure enhancements could lower costs of manufacturing in the Philippines, a sector that has traditionally lagged growth in services and consumption. And more importantly, better infrastructure should prepare the country to withstand the next powerful storm.

This is not to downplay the human disaster of such storms. Too often media attention to countries like the Philippines, Thailand and Sri Lanka comes chiefly when there are natural disasters, as if these nations are powerless and battered in the face of wild uncontrollable forces.

The historical reality is that Asian countries have proven to be resilient in the wake of natural disasters, and the economy of the Philippines seems capable of weathering this particular storm. In fact, outside of the Indian subcontinent and Indonesia, Asia as a whole tends to run current account surpluses—counter to the common perception that the region remains subject to the unknowable rhythms of outside forces. Asia’s economies have been resilient in the face of recent financial setbacks as well—both the 2008 global financial crisis and the recent volatility related to potential tapering of monetary stimulus. Perhaps it is time to stop thinking about Asia as a region that is helpless in the face of storms, both natural and financial, and time to see it as one that is able to adapt and grow over the long term despite these events.

Asia is fundamentally more resilient than most people realize, and we believe the Philippines will make it through this disaster. But, for now, our thoughts and wishes are with the storm’s victims.

Robert Horrocks, Chief Investment Officer at Matthews Asia

Networks are the Difference for Women Entrepreneurs

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Some barriers are easier to see than others. The obstacles women face are overt throughout some cultures and corners of the world—laws against driving and owning property, rules barring them from certain social settings—while others are more subtle.

There are no hard-and-fast rules that prevent women in Latin America from starting their own businesses. Actually, with mid-to-larger companies often reluctant to hire qualified women for any number of poorly-premised reasons, small business would seem like a natural launching point for the more enterprising among us.

So then, why aren’t more women succeeding as entrepreneurs?

A working group I lead has explored the role of women in Latin America’s small, medium and large businesses, and found that they are consistently underrepresented across the board, in terms of their leadership roles.

But the reasons for this are not easy to “pack” into one answer. In some countries of Latin America, women seeking to start up their own businesses must face deep-seated cultural obstacles, such as the stigma of a woman’s perceived role being in the home and the prejudice that women cannot negotiate or play hardball.

I dare say when women play golf … well, they just play golf.

In other more sophisticated countries of the region, women may face a disadvantage because the business environment is not ready to accept the way women do business.

The examples abound. Take golf, for example. For the business elite, golf has traditionally served as the go-to sport of leisure for men—a place to unwind. But for captains of industry and the ambitious alike, there is no clear distinction between business and pleasure. Mergers, acquisitions and takeovers are hammered out between the first and the ninth hole. These interactions are relational, but transactional in their ultimate goal. I dare say when women play golf … well, they just play golf. The interaction stay at the relational level. If women are watching their kids on the playground, most likely they are chatting with other women who may have interesting professions, but they are not using those encounters to do business. Women tend to be more compartmental: business is business, and other activities such as leisure or sports, are … leisure or sports.

Women often lack alternative sources of funding beyond their immediate networks of family and friends, as banks finance less than 20 percent of their business needs. The irony of the situation is the fact that women are more likely to found businesses that they are passionate about, as opposed to businesses that are shallow cash-grabs. Businesses born of true passion are more likely to grow and succeed. They are in fact the best investments, but face the most challenges when getting seed capital.

Still, women are dogged by misconceptions in business. There is a prevailing notion that women are more risk-averse by nature—a notion that I find patently absurd.

Being a dynamic leader in business is the one key factor that can lead to success. We have found that being a dynamic entrepreneur is directly correlated to how engaged and active he/she is, and it is also a relatively-solid predictor of success. A dynamic entrepreneur tends to proactively solve problems to improve her chances of success, rather than blame the tough environment for her lack of success. We have also found that women who become dynamic entrepreneurs often come from families in which a parent, a sibling, or a partner is an entrepreneur as well. Due to economic crisis, there are today many couples starting together their ventures as a way out of unemployment.

Small business is a ladder, an accelerator, a way for people to thrive

It takes a regional approach that also takes into account cultural differences among countries to address these systemic shortcomings. In a survey done in Uruguay, women seemed to place themselves second to men when it came to business skills. This could be related to not being offered training courses tailored to their specific needs and profiles. The Multilateral Investment Fund (MIF), part of the Inter-American Development Bank, recently started a partnership with Endeavor and OMEU to meet these women’s needs and help them reach the next level in their ventures.

Meanwhile, in a survey done in Argentina, conclusions were different. Many women saw the fact of being a woman a plus for their entrepreneurship aspirations. The ones who were less dynamic, saw their lack of success correlated to the difficulties in the business environment, whereas the dynamic ones saw their problems as one more obstacle to sort out on the road to success.

Early this year, the MIF supported a regional accelerator, NXTP Labs, that is already having some success nurturing teams with women founders. In a recently approved project to consolidate angel networks in the region, the MIF will create incentives to support angel networks that include women in leadership roles, as investors or as target for investment .

Our findings in the recent undertakings in both Uruguay and Argentina, along with other results that could help drive successful women entrepreneurs in the coming generations, will serve as the backdrop for WeXchange, Latin America’s first pitch conference focused on strengthening the networks for this demographic. There, we will provide a platform for Latin America’s most promising women entrepreneurs, key investors and international experts. Together, these minds and voices can change the reality and even out the playing field.

Small business is a ladder, an accelerator, a way for people to thrive and earn outside of the typical corporate constructs. The startup ecosphere is where innovation happens. How can this economic engine be effective if half of the population is excluded from fully participating in it?

Opinion column by Susana García-Robles, Principal Investment Officer in charge of MIF Early Stage Equity Group, MIF/FOMIN (Multilateral Investment Fund)

Bubbles Without Borders?

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¿Burbujas sin fronteras? — Foto: Jeff Kubina. Bubbles Without Borders?

If you are a wealthy person living in Asia, you might be tempted, with good economic reason, to look overseas to diversify your asset base. Overseas markets often offer good diversification as they are typically exposed to different economic cycles and also give exposure to different currencies. But while overseas stocks, bonds and other financial instruments all offer diversification, few asset classes seem to have the same allure as overseas property—that is, overseas property in the right cities.

What qualifies as the “right” city? One criterion is that the place must have a predictable, deep-rooted legal framework offering strong property rights protection, and another is that it must welcome foreign capital. The locale should offer urban character with an appealing quality of life, which may include clean air and water, highly rated schools, good restaurants, a vibrant nightlife and upscale shops. Easy access, preferably via non-stop flights to Asia, is also a plus.

For a rich individual in Asia, acquiring overseas property tends to be a very logical microeconomic outcome. When enough wealthy people shop overseas for property, it soon becomes a macroeconomic trend. And as happens with booms, more money chases the same asset class as the awareness of soaring prices spreads. Soon, the demand dynamics arising from this diversification might even divorce the host city’s (even host country’s) property market from local economic realities. A case in point is London’s real estate market. The U.K. economy and London-prime property have taken entirely different trajectories since the global financial crisis. While the country’s economy has just started to recover, London’s property rates have been far more spectacular. Sydney and Melbourne property markets also seem detached from the broader realities of the Australian economy (its property market hasn’t seen the kind of correction the U.S. market has seen from the 2007 highs).

Even in San Francisco, where I am based, I have heard of instances in which people visiting on business are making cash offers for homes on the weekends. No wonder, then, that top-end properties in places like Vancouver and Toronto, not to mention markets such as Hong Kong and Singapore, have all been hot commodities. And this trend is increasingly spreading to the middle end of the market; I recall seeing ads in Asian newspapers heavily promoting properties well outside of Central London.

So property in large desirable cities seems to have become a global asset class of choice for the emerging world’s affluent. Understandably, some localities are trying to restrict this activity. But I wonder if we should start factoring in this free-flowing global capital—and not just local economic conditions—as an important component of real estate market analysis in certain urban areas. Prices may still correct in such world-class cities, but the global demand could potentially put a floor on the correction. Also, as the fairly restrictive capital outflow rules in markets such as China begin to lift, the resulting capital flows could very well provide a further backstop to high-end property prices.

Vivek Tanneeru, Research Analyst at Matthews Asia

Art Markets in Latin America: Demand & Outlook

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In 2012, Latin American auction sales saw massive growth- increasing by 25% to $84.8 million. Although the latest round of auction sales (in May 2013) showed just a modest 2% increase (from November 2012 sales) auction sales continue to be robust and steadily grow in the Latin American market since the 2008 crisis.

There is broad consensus amongst art experts that the Latin American market will experience growth. ArtTactic, the leading art market analysis and research firm, published in its 2013 outlook that 67% of art buyers expect the Latin American art market to expand in 2013. Also significant is Latin America’s distinction as the regional market which art collectors and professionals have the most confidence in: 59% believe that the market will be positive- by far the most of any of region.

Latin American art is often characterized as undervalued, as there has not been an “explosion” in prices as there have been in other 20^th century art categories. Alejandro Zaia, chairman of the London Latin American art fair PINTA, characterizes the market: “slowly, but steadily, prices are heading up,” and “you still have undervalued artists, you have opportunities, but it is not the same as 10 to 20 years ago.”

In 2012, there was strong demand from regional buyers- which may be a consequence of positive economic conditions in markets such as Chile, Brazil and Colombia. According to the Fine Art Fund Group, there has also been a strong demand for modern art work outside of Mexico (which has played a dominant role). Now art works from Brazil, Chile, Venezuela, Colombia and Cuba are also facing strong demand, signaling “that new collectors related to these regions are playing an increasingly important role in the growth of the Latin American art market.” This newly expanded regional base is encouraging for Latin American art. But the expanded base doesn’t just apply to regional players- Latin American art is experiencing its own driving force of globalization, gaining international recognition and demand from buyers in Europe, the US and Middle East. Latin American art fairs have been a key infrastructure trend, and have started to attract attention from the international art world. A positive outlook in the market coupled with stronger regional and global demand are all positive forces for the Latin American art market and are encouraging signs for investors.

Conclusion

The art markets have strong forces driving demand: globalized buyers, the increasing ultra high net worth population and potential for increased allocation to art in investor portfolios. Experts see value in the Latin American art market, and BigSur is happy to act as a player in supporting the growing visibility of Latin American art and bringing it to the world stage. This year BigSur is sponsoring The Modern & Contemporary Latin American Art Show, PINTA, held in New York City on November 14^th. In particular, we will be sponsoring a special exhibit on José Gurvich, a very important artist who among other things, embodies the diaspora phenomenon- born in Lithuania, raised in Uruguay, travelling and working extensively throughout Europe and Israel, and finally ending up in New York in 1970. All these diverse environments and experienced shaped his unique artistic talent.

You may access the full report through this link

Article by Ignacio Pakciarz (CEO) and Ilina Dutt (Research Analyst), BigSur Partners.

Argentina: Not For The Faint of Heart

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Argentina, solo para los valientes — Foto cedidaChris Palmer, manager of the Henderson Gartmore Latin American Fund . Argentina: Not For The Faint of Heart

The Argentine stock market has risen close to 50% in US dollar terms this year as stronger economic activity has combined with the hope of political change to entice investors back to this volatile frontier market. The attraction of Argentina is not dissimilar to other countries in Latin America, being resource-rich and having supportive demographic trends. However, the problems are also familiar, as populist and protectionist policies have been a hallmark of Argentine politics. This has become a major problem in recent years as Cristina Fernandez de Kirchner, who succeeded her late husband, Nestor Kirchner, as President in 2007, has resorted to price controls and nationalisations, as well as refusing to pay creditors. Much needed foreign investment in the country has consequently been scared away while the government’s fiscal situation has continued to deteriorate.

For observers of the finer details of Argentine economics, there is much confusion about both inflation and the currency. The official inflation rate is just over 10%, but the actual figures are estimated at more than double this – fines have been meted out to economists who publish ‘unofficial’ rates. Dwindling foreign currency reserves have also prompted restrictions on the purchasing of US dollars, causing much interest in the value of the black market “blue dollar”, where trading activity is high. Whilst the official exchange rate is around just shy of 6 pesos to the US dollar, the blue dollar is closer to 10, implying a huge devaluation.

Hopes of political change were raised recently when Kirchner’s ruling party saw its share of the national vote drop by close to 20 percentage points at the October mid-term elections. This essentially rules out the possibility of Kirchner changing the constitution to allow herself to run for a third term in the 2015 Presidential elections. The general consensus is that the alternatives to Kirchner will offer a more orthodox economic policy, paving the way for a more investor-friendly environment. However, the opposition is fragmented and potential Presidential candidates may resort to populist rhetoric to garner support.

This leaves investors in a quandary. Despite the recent rally in the market, the MSCI Argentina Index is still trading at less than half its 2008 peak, valuations in the stock market appear attractive, while political momentum has clearly shifted. Offsetting this is the risk of a significant devaluation of the currency and the painful process that the economy will have to go through before it comes out of the other side. The rewards from a recovery in Argentina are tempting, but they are not for the faint of heart.

In terms of activity, we have introduced Argentine oil and gas firm YPF to the strategy on the view that its shale oil and gas potential outweighs the macroeconomic risks. Argentina is believed to possess a significant amount of the world’s shale gas. Recently, the company reported a jump of 87% in net profit over the third quarter versus the same period in 2012 thanks to higher natural gas and gasoline prices.

Chris Palmer, manager of the Henderson Gartmore Latin American Fund