LATAM and EMERGING MARKETS, opportunities in changing times

JOAQUIM LEVY Lima - September, 2013

201 3: a year of transition, with impact on emerging markets

and Equity Indexes* (base Jan-Sept 2013 =100) MoedasCurrencies e Bolsas dos pases emergentes 31/dez/12
C u r r e n c y d e p r e c I a T i o n
16.00% 14.00% 12.00% 10.00% 8.00%
6.00%

frica do Sul Rupia Indonesia Latam x Other Emerging: currency more stable more adjustment in equities Indonsia Real Brasil Peso Colombia Rupia India Zar Africa do Sul
ndia

10.00%

5.00%

Desvalorizao das Moedas

Lira Turquia 0.00%

soles
Colmbia Peso Chileno Turquia -10.00% -5.00%

Mxico 4.00% 2.00% 0.00% 0 0 Peso Mxico 1 2 1 2

3 3

Chile Brasil

-15.00%

Peru
4 4 5 5 6 6
(% PIB)

7 7

-20.00%

Current Account (% GDP) Dficit emDeficit Conta Corrente

* Equity indexes in local currency 2

Variao das Bolsas

A d j u s t m e n t

E q u e i t i e s

So should we be very worried about Latam or Brazil?

Not so much if we anticipate and understand the markets

BRAM presentation and cover of a major business newspaper in Brazil a year ago!

The Global Crisis and Latin America Outperformance or Short-Lived Decoupling?

Economic Outlook: How Is Latin American Region Facing In the Global Context and How Much Has the Euro and US Crisis Impacted the Regional Outlook?
Fund Forum Latam November 2012
Fernando Honorato Barbosa Chief Economist Executive General Manager

Swings in prices are natural in public markets and in funds with daily NAV it may be the cost of transparency
4

Realignment affected all asset prices

TRK

AUS

IND

Market performance of LATAM provides cushions for the economy

Stock Exchange Market Cap 30/08/13 (USD Mn) Brazil 920.625 Mexico 474.960 Chile 272.244 Colombia 222.947 Peru 78.716 Russia 541.740 South Africa 441.435 Turkey 232.490 Poland 178.984 Bulgaria 5.611 Hong Kong 3.229.861 China 3.159.983 Australia 1.264.070 India 905.279 Taiwan 846.714 Indonesia 361.652 Philippines 203.601 Equity Index (in USD) Dec-07 Jan-03 -41,6% 235,2% 9,3% 304,6% 24,7% 196,5% 69,3% 1018,3% 1,5% 877,1% -46,9% 161,8% -2,5% 190,6% -30,9% 208,4% -33,5% 195,4% -77,3% 11,3% -21,4% 78,6% -52,5% 110,6% -18,6% 95,5% -45,7% 157,9% 2,1% 50,6% 27,1% 403,8% 55,5% 439,9% Currency Value (in USD)* Dec-07 Jan-03 -25,4% 20,2% -18,5% -17,7% -2,4% 22,7% 4,4% 49,0% 6,7% 23,6% -26,1% -10,1% -33,2% -32,9% -42,6% -27,2% -23,9% 25,0% -9,6% 13,3% 0,6% 0,1% 19,3% 35,2% 1,7% 25,6% -40,0% -31,0% 8,4% 13,5% -16,0% -24,0% -7,5% 24,3% Change in Market Cap Dec-07 Jan-03 -34,2% 370,3% 19,2% 260,5% 30,8% 235,2% 146,1% 2337,9% -2,0% 382,9% -64,2% 145,6% -3,2% 195,0% -17,5% 322,5% -14,1% 430,1% -70,1% 495,9% -9,1% 260,0% -17,9% 686,4% -10,6% 154,6% -50,1% 313,6% 20,8% 108,6% 76,6% 654,4% 99,7% 810,1%

Latam

CEEMEA

Asia

(*) (-) depreciation / (+) appreciation Source: Bloomberg

Recent adjustments are healthy and help avoid the building up of distortions
6

Frontier markets rose more than more mature ones in the wake of QE1&2

Stock Exchange indexes 2000-2013 Indonsia

Peru

Philipines

When bonds adjust, those with higher yields may recover quicker

USD performance against major currencies(ytd) Bonds Performance 2007-2013

CEMBI investment grade yields by region (%)

CEMBI South Africa Latin America Asia Corporate 45,52% 44,51% 57,60% 61,38% 54,00%

EMBI Sovereign 48,94% 51,16% 48,73% 50,22%

Latam

EM Europe Treasury (7-10 y)

Source: Bloomberg, JP Morgan

Latam USD Bonds have deep markets and comprise strong companies
USD bn Market Cap Avg Yield % % Total

Brazil Russia China Hong Kong Mexico

$136 $100 $76 $54

7.3
6.1 6.6

20% 15% 11% 8%

5.5
5.9 6.4

$42
$33 $33 $23
$18
$17

6% 5% 5% 3% 3%

India
Korea UAE Qatar Singapore Others
0

3.8 5.2
4.2 4.6

3%

6.5
20 40 60 80 100 120 140 160

21%

Top 10

Africa

Asia

Europe

Latin America

Middle East

Source: JP Morgan CEMBI, as of 30th August, 2013

US recovery: the engine beneath the changes in market conditions

% aa

Simulaes - Treasury 10 anos

10y US Treasury Yields

Projeo

61.0

PMI Developed & Emerging PMI:US, Desenvolvidos, Emergentes e EUA

55.7

7.00%

59.0
57.0 55.0

6.00% 5.00%
4.00% 3.00% 2.00% 1.00%

3.8% 3.3% 2.8%

53.0
51.0 50.8 50.0

49.0
47.0

2000Q1

2001Q1

2002Q1

2004Q1

2005Q1

2006Q1

2008Q1

2009Q1

2010Q1

2012Q1

2013Q1

2014Q1

2003Q1

2007Q1

2011Q1

2015Q1

Apr-11

Dec-11

Aug-12

Dec-12

Apr-13

Apr-12

PIB = 3,0%

PIB = 2,0%

PIB = 1,0%
11500
10500 9500 8500 7500

Emergentes

Desenvolvidos ex EUA

EUA

Pessoal Ocupado Million (milhes of Jobs in the US - dessazonalizado)

148 143

EUA: Produo e Importao de Petrleo Oil production and imports (Barris/Dia)

146.1
144.3

138
133 135.7
138.0

6500
5500 4500
mar-94 set-94 mar-95 set-95 mar-96 set-96 mar-97 set-97 mar-98 set-98 mar-99 set-99 mar-00 set-00 mar-01 set-01 mar-02 set-02 mar-03 set-03 mar-04 set-04 mar-05 set-05 mar-06 set-06 mar-07 set-07 mar-08 set-08 mar-09 set-09 mar-10 set-10 mar-11 set-11 mar-12 set-12 mar-13

128
123
Fonte: Bloomberg

3500

jan-01

jan-12

jan-02

jan-03

jan-04

jan-05

jan-06

jan-07

jan-08

jan-09

jan-10

jan-11

jan-13

Produo

Importao

10

10

Aug-13

Aug-11

Feb-12

Feb-13

Feb-11

Oct-11

Jun-11

Jun-12

Oct-12

Jun-13

How does LATAM fare against other emerging markets?

Median Age Population (2010) 29,8 28,6 33,0 27,7 26,7 36,3 26,7 28,9 39,1 38,8 29,2 25,5 Fiscal Current Deficit Account (% (% GDP) GDP) - Latest - 2012 Data -2,2 -3,2 -1,9 -3,5 0,6 -4,0 -2,4 -1,3 1,9 -3,5 -1,8 2,4 -7,2 -5,1 -1,8 -3,3 -3,9 -2,8 0,4 3,0 -2,0 -6,6 -4,9 -6,5 Benchmark Government CPI (%) - Interest Rates - Expenditures (% Latest Data Latest Data GDP) - 2012 6,1 9,0 38,6 2,3 3,3 18,0 2,2 5,0 21,4 3,5 3,8 20,0 3,3 4,3 19,7 2,6 6,0 24,4 9,5 7,5 28,3 8,8 7,3 18,0 1,1 2,5 42,3 6,5 8,3 36,5 8,2 4,5 39,2 6,4 5,0 38,5

Brazil Colombia Chile Mexico Peru * China * India Indonesia Poland * Russia Turkey South Africa

GDP (%) 2012 0,9 4,0 5,6 3,9 6,3 7,8 5,0 6,2 1,9 3,4 2,2 2,5

GDP (%) 2013 2,3 4,1 4,4 2,3 5,5 7,5 5,1 5,8 1,1 2,3 3,6 2,2

Sources: The Economist, Bloomberg, S&P

LATAM stands out for: Young population Good Fiscal Low inflation Current Account in line Moderate Growth Small public sector

11

11

Debt in LATAM is as good as elsewhere (or better)

Latam CEEMEA sia

Colombia Mexico Brazil

Rating (S&P)

Peru BBB+ 13,2 43,1 95,7 29,3 14,6

Chile AA9,4 59,9 279,8 43,9 19,4

Turkey Russia S. Africa Poland Indonesia BB+ 13,1 104,9 342,8 42,7 29,3

ndia

China

BBB 12,6 132,9 225,2 21,3 14,2

BBB 10,7 82,0 227,1 29,6 21,0

*BBB
5,0 29,9 121,7 20,4 7,4

*BBB
13,5 57,8 133,5 31,0 13,0

BBB 18,7 174,0 333,9 35,8 20,3

A30,3 155,4 363,0 70,8 19,2

BB+ 14,4 111,8 222,7 28,6 17,8

BBB6,1 43,8 148,1 20,6 23,5

* AA22,3 9,0 73,4

Public Sector Ext. Debt / GDP Public Sector Ext. Debt / Reserves External Debt (% Reserves) External Debt (% GDP) Short-Term Ext. Debt (% of total ext. debt)

Govt Debt (% GDP)

32,2

28,7

58,7

19,8

11,9

36,1

10,8

40,1

55,6

23,6

68,3

29,4
12

Sources: S&P and Moody's (2012)

12

Democracy and Commitment to the Market are transforming the Region

Latam: diversity in commodities, manufacturing and services sectors Pacific Alliance/MILA and BRAIN can help providing liquidity and a common platform, ATTRACTING TRADING TO THE REGION A LATAM passport would help balance market weights across the region
Correlation of Stock Prices 2003-2013
1,00

Typical allocation of BRAMs LATAM

Mxico 20%-24%

Equities Fund

(underweight Brazil
vis-a-vis MSCI)

Panam 0-2% Colmbia 2-6%

Brasil 50-60%
Peru 2-5%

Brazil
0,90

Peru

Chile 8-12%

0,80

0,70

MEX

COL

CHL

BRZ
13

Brazil from the perspective of a USD 120+ billion AUM Asset Manager
Conventional Perception A Commodity-based Economy Highly dependent on Exports to China Fiscal fragility Credit / Property Bubble Service-based Economy Exports are 12.5% of GDP, and exports to China account for 18% of exports (< 2.5% of GDP) Primary surplus, total public debt < 60% of GDP (including subnational debt), international reserves of US$300+ billion Total bank credit/GDP of 52% x 100%+ in OECD countries NPLs at 7% for households and 4% for Corporates. Stock of mortgage loans < 5 % of GDP Banks external liabilities account for 6% of GDP Above-average investment in machinery & equipment, a gap in infra-structure and housing, being filled by the private sector through concessions and more corporate bonds (12.431) First-rate Pension Plans and individual savings schemes (PGBL) Overall improved sentiment towards global equities can offer attractive buy opportunities
14

Reality

Low-investment country

Lack of Savings Negative Sentiment towards Emerging Markets

A sample of Brazilian Pension Funds

15

Brazil from the perspective of a Mid-Small equities portfolio

A broad universe that offers growth and defensive stock picking opportunities. Diversification Typical Holdings of Mid-Small Fund
Suzano TIM Anhanguera Gerdau Cosan Mills BB Seguridade Hypermarcas Marcopolo Embraer Relevant Market Sector Domestic Foreign Cellulose yes Telco yes Education yes Steel yes yes Energy yes yes Engineering yes Financials yes Retail/Pharma yes Mechanical yes yes Aerospace yes yes

Potential gains from market consolidation

Market share of top Brazil and US companies
Sector
Healthcare Plans Shopping Malls Supermarkets Commercial Properties Car Rental Private Education

Rank
Top 10 Top 3 Top 5 Top 10 Top 4 Top 3

Market Share %
Brazil 33 22 36 9 30 22 USA 56 56 62 n/a 94 n/a

Potential upside from technical pressure

P/E Growth EPS 2013 2014 2013 2014 BRAM Coverage universe Mid & Small Cap* 15.0 13.6 19.1 15.3 12% 28% 14% 21%
16

Brazil from the perspective of the streets

Students in College (in 1000s)
30,000
200 250

Anhangueras stock x Ibovespa (2011-13)

20,428 14,000 6,500 3,840 3,529 2,556 2,479 2,245 2,149 445
50 150 IBOV 100 AEDU

USA

India

Turkey

Poland

China

Brazil

Germany

Belgium

France

Japan

UK

Feb-12 Mar-12

May-12

Feb-13 Mar-13

Apr-13 May-13

Dec-11

Nov-12 Dec-12

Aug-12

Sep-12 Oct-12

Million new (formal) jobs Job Creation

3.0 2.5 2.0 1.5 1.0 0.5 0.0 2004 2005 2006 2007 2008 2009 1.9 1.6 1.5 1.7 1.4

(Million)
2.6

2.0

1.8

1.3

1.2

2010

2011

2012 2013E

Aug-13

Jan-12

Jun-12 Jul-12

Jan-13

Apr-12

Jun-13 Jul-13

17

Thank You
Thank you !

Gracias

Bradesco presena

18