State Street has published a new report that focuses on Latin America. Latin America’s Major Five: Assessing the opportunities, is the latest in State Street’s Vision series of reports.
After decades of economic upheaval, Latin America is enjoying strong economic growth. Wealth creation in the region is contributing to a projected five-year compound annual growth rate of 15% for the USD2.2 trillion in institutional assets owned by Latin America’s central banks, sovereign wealth funds, pension funds and mutual funds, with half of these assets represented by the USD1.1 trillion Brazilian onshore fund industry, according to State Street estimates
The large concentrated asset pools in these countries and their strong growth prospects have the potential to create significant opportunities for global asset managers and service providers
With foreign reserves growing across the region (net official inflows were USD23 billion in 2009 and USD22 billion in 2010), Latin America is creating new sovereign wealth funds to invest reserves and absorb windfall profits from commodities. Mexico’s Oil revenues Stabilisation Fund has USD6 billion in assets, Chile’s Social and Economic Stabilisation fund has USD21.8 billion generated from copper revenues and the Sovereign Fund of Brazil has USD11.3 billion. Peru is creating its own sovereign fund to hold profits from copper revenues and Columbia may also announce an oil stabilisation fund soon
Spurred by mandatory participation and a large working population, the pension systems of the major five have seen rapid asset growth. The privatised pension systems of Chile, Columbia, Peru and Mexico account for some USD400 billion in assets today, of which approximately USD120 billion are cross border. Allocations to overseas investments is climbing due to limited capacity for domestic investments. But room for growth in international investment allocation remains as the average overseas allocation is only 27% across all Latin American private pension managers
However, a variety of challenges lie ahead for financial institutions looking to exploit opportunities in the region, including: whether the same trends that boosted economic growth in the major five countries also increased systemic risk? and what are the cultural, regulatory and taxation challenges faced by asset managers looking to sell products or to invest in the region?