Bloomberg Línea — Brazil and Mexico are looking at a rare opportunity to attract foreign capital as investors’ demand for infrastructure, energy transition, and sustainability-related assets keeps rising in a bid to shield portfolios against inflation, as well as meeting ESG allocation criteria. BlackRock, the world’s largest asset manager with over US$9 trillion in assets, pointed out this trend in an interview with Bloomberg Línea.
“Latin America has a fantastic opportunity to capitalize on this [mega-trend]. I believe there will be more investment not only from the United States but also from Chinese companies ... There are many benefits: natural resources, geography, proximity to the United States, and also to Canada,” said Aitor Jauregui, Head of Latin America at BlackRock, during a trip to São Paulo earlier this month.
The Spanish executive took over the leadership of the asset manager’s regional operations in March. Previously, he was the Managing Director for Spain, Portugal, and Andorra.
”We have seen a growing demand and interest from clients to invest in developing countries. Countries that will be at the forefront of climate infrastructure, essentially, and in climate technologies that will accelerate the transition,” said Jauregui.
Reflecting this demand, BlackRock recently announced its first investment in a Latin American company through the Climate Finance Partnership, a collaboration between the asset manager and the governments of Germany, Japan, and France for sustainable projects in emerging markets.
The investment was made for an undisclosed amount in the Brazilian company Brasol, which specializes in generating solar energy for corporate clients.
“It was the first investment from one of our foreign funds, with foreign capital and technology, that is making Brazil and Latin America more sustainable. We see a great demand from global investors for this type of project,” said Karina Saade, Country Manager for BlackRock in Brazil, in the same interview with Bloomberg Línea.
The following interview with Aitor Jauregui and Karina Saade, from BlackRock, was edited for clarity.
Bloomberg Línea: What opportunities does BlackRock see for Latin America? In which markets?
Aitor Jauregui: I would think about this strategy in three different pillars or verticals. One is in commercial initiatives, focused on business. The other is more related to talent and how we support our team and foster this growth. And the third is the ecosystem, promoting different initiatives to become even more relevant in the communities where we operate.
When it comes to business-related initiatives, I believe the region has many opportunities to promote investments in infrastructure, climate infrastructure, and new technologies that will accelerate the transition to a low-carbon economy, for example.
In the region, there have been many countries highly dependent on hydrocarbons, but I see positives due to the natural resources and how the region is preserved.
What are the business opportunities in the region?
Jauregui: We are present in different countries and have significant operations in Mexico. We have 225 people there, covering both wealth management and institutional business areas. Something interesting is happening in the country: contributions to the pension system are increasing, unlike what might be happening in the rest of the region, not necessarily here.
In Mexico, the private pension system will double in size due to these contributions, which will increase from 6.5% to 15%. There is a lot happening in this institutional space.
When it comes to the wealth management ecosystem, and I believe this is common throughout the region, we see a lot of demand for portfolio models and fee-based advisory.
We have many discussions about the role of a holistic portfolio view, looking at portfolios in a comprehensive way, not only with products but also with asset allocation advice, portfolio construction, portfolio consultancy, analysis, technology to manage risks. This is shaping and reshaping the wealth management ecosystem in the region.
What are the main strategies for Latin America? And how do they differ from those for Europe, for example?
Jauregui: An area that has certainly stood out in recent years is alternative assets in private markets. But that has shifted somewhat. If you look at the subcategories within the alternative business, private equity was dominant a few years ago. Now, with inflation rates as they are, we see more demand for private credit and infrastructure. They are also protections against inflation, effectively helping to safeguard portfolios. This is a global trend.
When I think specifically about Latin America, I believe there will be a huge demand for infrastructure. The Brazilian government has been talking about it. The same goes for Mexico. With the increased constraints in the supply chain, there will be much more to be built in Mexico in particular. But also across the region.
And climate infrastructure: wherever we go, clients understand that climate risk is an investment risk but also an opportunity. They ask us how to capitalize on this and gain access to decarbonization strategies.
Karina Saade: We’ve just made our first investment in Latin America. It was in Brazil, in a company called Brasol, focused on solar energy. It was the initial investment from one of our foreign funds, with external capital and technology that are making Brazil or Latin America more sustainable. We observe significant demand from foreign investors for this type of project.
Does this mean that BlackRock has been evaluating other companies in which you might invest?
Saade: Yes. We have various types of investors across BlackRock seeking different strategies and objectives. We analyze many different types of assets based on different sets of criteria. We don’t have a single view. We offer a lot of autonomy to our investors, and that really allows us to pursue different kinds of opportunities. We observe that there is a lot of capital, at least outside Brazil, seeking these types of investment opportunities.
Jauregui: The investment Karina referred to in Brasol is part of a portfolio called the Climate Finance Partnership (CFP). It’s a joint public-private initiative led by the governments of Germany, Japan, and France.
We’ve seen a growing demand and interest from clients to invest in developing countries. Countries that will be at the forefront of climate infrastructure, essentially, and in climate technologies that will accelerate the transition. Therefore, we’ve invested in Thailand, Kenya, the Philippines, and now in Brazil. We are building this portfolio.
Are these investments related to the mega-trend you mentioned?
Jauregui: Yes. We believe that Latin America has enormous potential, much like India, which really garners a lot of attention worldwide. Some countries in Southeast Asia as well. And I think Latin America has a fantastic opportunity to capitalize on this. I believe there will be more investments not only from the United States but also from Chinese companies that want to invest in Latin America. There are many benefits: natural resources, geography, proximity to the United States, and Canada.
Saade: And demographics. Many developed countries face negative population growth rates. Many people look at Latin America and say, ‘Well, I’m thinking about emerging markets, ex-China, and Latin America really seems interesting from a relative perspective.’
India is also a very promising market, but, in fact, it’s quite expensive from a valuation standpoint. In terms of valuation, Mexico and Brazil seem much more favorable and have many similar trends from a fundamentals standpoint. We see many investors looking at Mexico and Brazil on a relative basis within an emerging markets investment portfolio.
Can adverse winds from the external scenario, such as higher interest rates in the US, affect this investment flow into LatAm?
Saade: Certainly, yes. I believe what the Fed does will impact everything. And certainly, as the Fed maintains high-interest rates, which we believe will happen for a longer period, it will impact resilient monetary policies and also resilient currencies.
I think foreign investors, speaking more broadly, need more visibility on what the Fed will do in order to significantly increase their allocation in emerging markets. Once that visibility is achieved, I believe Brazil and Mexico will be relative beneficiaries. But I think we are at a moment where they need to understand the second derivative.
Jauregui: Brazil has been at the forefront of central banks that are actually reducing interest rates. And inflation is much more contained.
Is controlling inflation necessary homework for Brazil to effectively attract foreign investment? What about fiscal balance?
Jauregui: It’s something necessary, but that’s everywhere, I would say, not just in Brazil. I think from a fiscal standpoint, the US needs to apply it too. Everywhere we go, we see the same trend. So, yes, considering Karina’s earlier point, we think inflation will persist longer, if we consider the central banks’ target of 2%.
However, having said that, I believe investors are recognizing and living with it. And, as always, everything is relative. Hence, investors are seeking specific opportunities. Regarding Karina’s point, I believe that Brazil and Mexico, especially in the region, are very suitable to attract international capital because they play this dual role of supporting the local ecosystem for international investment, diversifying portfolios, and so on.
On the other hand, they are trying to attract international capital to be invested here in Brazil, with the example Karina mentioned and others as well. We have a wide range of investment solutions, not only in traditional active management but also in indexing, private markets, and so on.
From an asset allocation perspective, how much does the beginning of the monetary easing cycle in Brazil help toward the influx of capital?
Jauregui: This is a cyclical movement, and our vision is for the long term. There have been three consecutive interest rate cuts in Brazil, bringing the rate to 12.25% per year, and most likely, this trend will continue in 2024. But we’re not just thinking about 2024. Regardless of the obstacles that we, as an investment industry, face, it is our responsibility to continue educating people on how portfolios should be diversified to achieve different goals.
There’s a lot going on when it comes to goal-based investing thinking long-term. Do I need to invest for retirement? Or to fund my children’s education? Or to buy a new car in three years? Depending on the goal, the management obviously changes.
About 60% of our assets, those we manage on behalf of clients, are dedicated to the long term. We need to educate about this. Let me give you an example. In 2020, from mid-February to mid-March [during the first month of the pandemic], the stock markets dropped about 30%, right? In the US, around 35%.
Many investors who didn’t have a managed account or someone advising them on how to invest sold their stocks during that period. Therefore, they didn’t benefit from the market recovery. And this happened in most cases due to a lack of financial education.
What progress have you seen in the realm of financial education?
Jauregui: We’re now discussing something we’ve learned from Europe, for example, which is a new concept: savings plans in ETFs [Exchange-Traded Funds]. It’s very relevant to what’s happening, especially in Germany, although I would say across Europe.
There are many banks, many neo-brokers, digital players where, during the pandemic, many investors or savers were basically speculating. I buy this stock, then I sell it, I buy bitcoin, and then I sell it.
On the other hand, these digital players offer something that I find fascinating. It’s the concept of investing. It’s very simple to invest regularly, consistently, every first day of the month, $80, $100, in an ETF or a set of ETFs so that they start investing internationally and diversify their exposure.
They’re showing them why investing regularly, not depending on the market environment, and how you can benefit from compound interest. These are basic concepts.
There are 8 million new clients in Germany alone who had no exposure to investments and are doing this every month with a clear mindset of long-term diversification, with risk management. That’s fascinating. There are consultancies, not us saying this, that these 8 million will grow to 25 million investors by 2028. That’s a lot.
In Brazil, it’s very important to talk about the impact we can have on local communities. Karina and the team have done a fantastic job when it comes to financial education, for example, with inspiration for girls, with Junior Achievement, and with some initiatives we promote to encourage financial inclusion. With our fiduciary responsibility, we need to do more.
The more we help savers become investors and then think long-term about investments, the better. I believe society will save in a much better and sustained way in the long term. It’s one of the three pillars for the region.
From the perspective of progress in the private sector, what could further stimulate the entry of foreign investors?
Jauregui: A clear public policy for all sectors. Again, we’re not just talking about Brazil. In the private sector, if companies also strongly believe there will be growth, they will likely create more jobs. They will invest in technology and adapt their businesses to export even more. Of course, they will also import more, as we mentioned with some clients in the field. But job creation will be fundamental to continue growing.
When it comes to digitization, I believe Brazil is at the forefront in how everyone here embraces technology, which is quite remarkable. This spans from adoption in retail to the corporate sector
Saade: For many foreign investors, currency risk is a crucial element, especially for those with longer investment horizons in Brazil. Clearly, for shorter-term investments, it’s not as significant of an issue since you can enter and exit.
Therefore, any structure that mitigates currency risk for foreign investors is generally very favorable for attracting this capital. Sometimes, foreign investors choose Brazilian exporting companies that generate revenue in dollars because it naturally shields against currency risk. However, for more local companies, there are different types of solutions available.