Latin America's burgeoning asset management industry taken down a notch

Latin America's burgeoning asset management industry taken down a notch

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Moody’s Investors Service on Thursday revised its outlook for the Latin America and Caribbean asset management industry to negative from stable citing the impact of the global market rout underway in the deadly wake of the novel coronavirus, COVID-19.

The seizing up of the world’s economies, the result of governments ordering containment measures for all but essential businesses and civil servants, is widely expected to result in a massive global recession. How fast that economic slowdown reverses is still much in debate.

A prolonged plunge in the price of oil is also wreaking havoc on the region’s investment sentiment, but more importantly government revenue projections. Add in the extreme financial market volatility and rapid depreciation of Latin American currencies against the US dollar, and the outlook for a budding asset management industry is darkening.

“Despite the growth opportunity implicit in the low levels of industry penetration compared with other regions, the current, extreme scenario will limit inflows to funds in Latin America as well as fees for asset managers,” Moody’s said in a report.

Rising unemployment will prove to be a particular weakness for asset managers going forward. Job losses will reduce the amount of cash being put to work in pension funds, while at the same time the value of those assets have shrunk significantly, thereby cutting into fees managers collect.

One measure of the region’s financial health can be viewed through the lens of the 25 US-based mutual fund portfolios that invest solely in Latin America. Year-to-date, there has been a more than 50% drop in assets under management to just $7.4 billion from $15.9 billion, according to mutual fund tracker, Lipper, a division of data provider Refinitiv.

In the latest weekly measure of portfolio flows, this segment of the market saw net outflows of $171 million, marking a fourth consecutive week of net selling.

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Up until this year, the outlook for managing Latin America's wealth was on the upswing. Now, while the same conditions of weak economies, depreciation of currencies and volatile markets are not unique to any single Latin American country, Moody’s highlighted some differences.

In Brazil, the expectation is for weak investment flows this year, one that started out with much hope because of the long-awaited pension system reforms that were seen boosting overall economic growth.

Latin America's largest economy had been looking to expand beyond its traditional fixed-income instruments, as a burgeoning digital banking ecosystem was eroding traditional methods, spurring mergers and acquisitions and the hiring of top flight talent to reach for the growing middle class. 

Now that seems to be on hold.

“We do not foresee a rebound before the end of the year as economic turmoil and heightened market volatility will continue to weigh on the Brazilian asset management industry’s prospects,” Moody’s said.

A deterioration in fees will hit the small and medium-sized asset managers and could result in “some consolidation within the industry as independent asset managers pursue mergers.”

While it may not be unique to Brazil, the relatively recent spread of asset management tools and access to sources of information into the less financially  sophisticated population mean many investors new to the markets are not seeing steady returns but rather carnage in their portfolios.

“It remains to be seen how resilient such investors are during an exacerbated market correction,” Moody’s said.

The firm did however say Brazil’s asset management industry has weathered recent political turmoil and economic stagnation while boosting their AUM.

Mexico’s asset management industry could be the most exposed to the current market turmoil, however.

“We consider Mexico’s economic sensitivity high considering the weak economic performance in 2019 and even worse prospects in 2020,” Moody’s said.

The firm expects weak growth in the asset management revenue based coinciding with a negative performance for the economy.

There is likely going to be a shift to more short-term fixed income securities that carry lower management fees. Moody’s expects managers to concentrate on government securities for their safe haven status.

While Argentina has been going through a three year recession, the latest economic turmoil is not necessarily pummeling managers.

“Despite all of this, the local fund industry has proven to be strong in the face of investor redemptions, thanks to a high level of liquid positions as a result of a more conservative approach since August 2019,” Moody’s wrote, highlighting how AUM grew 12 percent in the first quarter of the year.