Alternative Latin Investor: Issue 1

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Attracting

Private Equity

Betting onIslamic Investors

Strong in Central America

Looking Outside the United States

Colombian Real Estate

A L T E R N A T I V E

LatinInvestorJuly / August 2009

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Hedge FundsAttracting Middle Easter Investment page 6 -What Islamic Investors are Looking for

The Local Edge by Christopher Ecclestone page 10 -How LatAm funds can Compete

Private EquitySteady in the Storm page 14 -Central American Private Equity

ForexWhat’s Behind the Moves by Kevin Sollitt page 18 -Tracking LatAm Currencies

Alternatives for Institutional Investors by Francisco Heredia page 22 -Forex Trading Platform Options

Agribusiness LatAm Opportunities by Steve Kaczor page 26 -Untapped Agricultural Resources

Renewable EnergyChilean Wind Power page 30 -LatAm Haven for Green Energy

Real EstateColombia Heating Up page 34 -New Real Estate Hot Spot

Technical AnalysisAnalysis of LatAm Indices by Fabio Verdelli,CMT page 38

PhilanthropyWhere Ultra-high Net Worth Individuals Give page 42 By Denise Recalde Regulation Brazil Improving Corporate Governance page 46

ArtIncreasing Interest in LatAm Art page 48

WineRegional Wines with Investment Potential page 52 By Nigel Tollerman

Contents

Whats inside:

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Welcome to Alternative Latin Investor. It is our mission to create a platform for both investment professionals and investors alike to share information regarding the in-dustry. With the current state of the global economy, volatile swings, crashing equity prices, information is one of the few commodities which always maintains its value. Despite the increase in the world’s interest in Latin America, there is to date no definitive source for news on the region and much less in the arena of alternative investments…till now.

Now with the US and European markets begin-ning the very slow road to recovery investors are look-ing to other parts of the globe for their assets, as the stability of Western returns are less dependable. As Latin America has suffered from one economic crisis or another from Mexico to Argentina, the region is better prepared to endure such hardships and as such returns have been more resilient. By creating Alternative Latin Investor we want to give the world a window into this part of the world. With content created by

Managing Editor Nate Suppaiah Content Editor Damian HampsonContributors Steve Kaczor Christopher Ecclestone Fabio Verdelli,CMT Denise Recalde Nigel Tollerman Kevin Sollitt Francisco J. HerediaDesign Arman SrsaUS Marketing David GormanLatin American Marketing Lucas GentileConsultants: Tyler Ulrich Jennifer Peck Angela SeitaIllustrations Matias OtamendiIllustration based on photo by David Noelte

Contact: [email protected]; (202) 905-0378

2009 Alternative Latin Investor, No statement in this magazine is to be construed as a recommendation for or against any particular investments. Neither this publication nor any part of it may be reproduced in any form or by any means without prior consent of Alternative Latin Investor.

Letter from the Editor

Contributors

industry experts sharing their expertise we can promise the highest level of quality and relevance. Via comments and emails we also wish to tailor our product to the needs of our readers, and we urge you to write us at [email protected] with any thoughts you may have. To all the alternative Latin investors, we hope you find the provided information both interesting and useful.

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Hedge Funds

Attracting Middle Eastern

InvestmentC

ash needy investors are hitting the hedge fund industry hard and many managers are expecting significant redemptions, at least for the first half of 2009. In exclusive inter-views with Alternative Latin Investor, Brazilian fund managers have spoken about their concerns about surviving the current worldwide economic downturn. Otavio Vieira of Safdie Private Banking expects to see a large contraction affecting Brazilian funds

“Assets under management will drop a lot, in 2010 there will be perhaps only 30 to 40 percent of As-sets under management when comparing with 2008 and this is causing many funds to close down”.

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Wine

“We’re all in the Middle East and North Africa region, but not Latin America. You’ve got to diversify your investments, you can’t have them all in one place.”

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With investors pulling out of funds as they look to liquidate their assets, Latin American Hedge fund managers are actively seeking new sources for potential clients. In the pre-credit crunch days Latin America’s commodity rich nations were be-ginning to attract serious interest through BRIC and Agro funds. However, rather than waiting for commodities to rise again Latin American fund managers could find that looking eastwards is a source of customers that could bear fruit. Alternative Latin Investor has been speaking with several Fund managers based in the Middle East to find how their Latin counterparts can at-tract valuable new clients in the region.

To date, the direct effects of the financial crises experienced by most developed economies in the Middle East have been relatively mild, when compared with other regions throughout the world, as banks and investment companies in the Middle East were not large holders of sub-prime mortgage backed securities. However, regional sovereign funds have taken some losses on their investments with global financial institu-tions. Additionally, Arab stock markets have not been im-mune from the Credit Crunch with stock indices in Gulf Cooperation Council (GCC) countries showing significant declines of between 30 – 60% in the final quarter of 2008. According to the US based Council on Foreign Relations early analysis points to sovereign funds with a high allocation into equities, emerging market and private equity may have lost as much as 40% in portfolio value between December 2007 and De-cember 2008. However, foreign funds continue to have significant reserves.

In speaking with various fund man-agers and leading financial figures in the Middle East, Alternative Latin Investor has discovered that any interest in Latin America has been limited to certain BRIC funds and Agro investments. Albert Barretto, Product Manager at First Gulf Bank in the UAE says Latin America has yet to engage the region “interest is negligible, because there has never been any kind of Latin American fund focused on investors here. Major focus on the past couple of years has been on the emerging markets and new emerging countries and in Latin America only Brazil has been getting interest from investors. Other than that the other countries have not been able to get much attention from clients”. Admittedly, the pre and post Credit Crunch scenarios are now poles apart but there are those in the Middle East that believe Latin America is a destina-tion of the future. In May 2008 Ithmaar Bank, a Bahraini Islamic investment firm, and two other regional firms, Kuwait based Al Safat Investment Company and Bahrain based Arabian ven-tures launched a USD$500 million Sharia-compliant property fund to invest in Latin America. Khalid Abdulla-Janahi, Ithmaar

Bank’s chairman says: “We’re all in the Middle East and North Africa region, but not Latin America. You’ve got to diversify your investments, you can’t have them all in one place.”

In the current worldwide economic climate attracting alternative investments from the Middle East has to be viewed as a long-term strategy. Investors in the region are pulling out of alternative invest-ments as they seek greater liquidity and Dr Aziz of BMB Islamic says trends indicate a greater confidence in more local investment vehicles “the recent phenomenon in the global market and Mad-hoff has affected the sentiment very significantly. So I think people are looking into those opportunities but more of it is happening on the regional side. So for example if a hedge fund manager or for that matter a private equity manager wanted to offer a fund. Unless they have some sort of association with the region say particularly in the Middle East for example – and they are able to offer it - and to manage the fund in the region. Then their ability to sell that product in the short run – in this year in particular would be rather limited. Any global exposure or outside the investors own region – because the investors confidence has been shattered a

lot - they are just trying to avoid get-ting involved in investments outside the region”.

Latin American Hedge Funds suf-fer from a lack of exposure and presence in the Middle East. The overwhelming message coming from Alternative Latin Investors contacts in the Middle East was that there was not enough informa-tion or exposure on Latam prod-ucts available. Albert Barretto at First Gulf Bank thinks if Latam has the right pitch it will eventually suc-ceed “The general allocation and education about Latin America is not as high as Eastern Europe and South East Asian economics, but

that has to be brought into the limelight a little bit more. Once they (investors) can see what is available then the interest will come out”. However, greater exposure to clients is only one factor when looking to tap into wealthy Arab clients. Increas-ingly Muslim investors prefer products that satisfy their religious belief and Albert Barretto feels its essential when looking for an opening “Sharia compliance would be the best way to get in because you have to break the mindset. Once you are inside the mind and they are going to make your presence felt, then you bring your other products from your shelf that are selling because the brand alignment has to be there, it’s the most important thing. And if you cant get Sharia compliance but you’ve actually got a good brand then that isn’t actually required because if you have good returns and your investments are covered then it will sell by itself”.

Latin American fund managers looking into the possibilities in the Middle East cannot fail to take notice of the increasingly

“The general allocation and education about Latin Amer-ica is not as high as Eastern

Europe and South East Asian economics, but that has to be

brought into the limelight a little bit more. Once they (investors) can see what is available then

the interest will come out”.

Hedge Funds

7

significant role Islamic banking is playing both in the Middle East and throughout the world. According to the World Islamic Forum, Islamic banks can now boast assets of more than US$ 1trn and its estimated by the IMF that there are now more than 300 Sharia–compliant financial institutions, compared with just one in 1975. Islamic banking is a system of banking consistent with the principles of Islamic law (Sharia) and its basic tenets are of sharing profit and loss, the prohibition of charging inter-est and it is forbidden to invest in industries contrary to the teachings of Islam such as alcohol and gambling. Excessive leveraging, which has been one of the strongest reasons for the global crash, is not permitted in Islamic banking. Dr Aziz of BMB Islamic told Alternative Latin investor that he has been involved in high profile meetings with important players from around the world looking to learn how Sharia banking can offer lessons to the conventional side of the industry “ I see an integration happening, with Islamic banking growing more across the world in places where it has not been present or significant before”. Whilst Islamic finance may provide some answers to the conventional banking crisis Dr Aziz is quick to warn it not a magic wand “Islamic financing is not the future for the world but there is no harm in taking bits and pieces which stick well”.

When speaking of a product being Sharia compliant it es-sentially means that the financing mechanisms within the deal have been analysed and approved by Islamic scholars who have found them to be within the teachings of Islam. For those new to Islamic finance there are two ways in which to make a product compliant: -

The first manner is more commonly found in Islamic coun-tries that naturally have greater demand for Sharia compliant products. A Hedge fund can seek to establish a Sharia board of their own to analyse and approve their products. Market norms dictate that there are a minimum of three scholars sitting on any board, although the number can reach as high as seven. Presently there are no more than 400 scholars in the world and demand is very high, particularly for the top 20 who enjoy international renown and can charge anything up to US$70,000 per annum for their services. With charges for a three scholar board around the US$200,000 mark Dr Aziz says this route is time consuming and not for newcomers “If you work with scholars you are talking about six months to one year (before you become compliant) and Hedge Funds are a complex business and there are not many of them (scholars) who understand the Hedge Fund business – even out of the top 20. In my view it’s not a very efficient or cost ef-fective way of doing business”.

The second route to compliance is Sharia advisory funds, which are an emerging trend liked by both scholars and funds alike. Essentially, a fund seeking Sharia compliance, but wanting to avoid the costly expense of setting up their own board, would form a joint venture with a Sharia compliant bank or Fund. Advisory funds are still a fairly new option in Islamic financing but are becoming increasingly essential as the small number of

Islamic scholars means their availability is severely stretched. One Fund manager in the Middle East told Alternative Latin Investor of the difficulties they had in securing a scholar “They are very high (the costs of scholars)….we tried to hire one for our FX funds. More than the high part of it, it’s impossible to get an appointment with them. We got an appointment after eight months and it was cancelled. Until you have a contact in the Middle East its pretty hard to get around to meeting them”. BMB Islamic can boast a seven member Sharia board with scholars from the Middle East, Far East, Asia and Europe. Such geographical diversity means that each scholar sitting on the board brings with them Islamic followers who adhere to their teachings and rulings. There are potentially more than 50 Sha-ria Advisory funds in the Middle East but as yet many do not operate efficiently or are only now waking up to their potential. Properly managed and with the right expertise Dr Aziz thinks the benefits speak for themselves “We can have a Hedge fund approved by the scholars in anything between eight to sixteen weeks. We are experts both on the financial business side of the client and we also understand the scholars because we are Sharia technicians as well. Funds like us retain the schol-ars anyway and hence we are able to spread our costs to our clients, so it won’t be them maintaining a Sharia board of their own for US$ 150 to 200 thousand”.

Attracting investors of any type is the most difficult challenge facing many Hedge funds in the current climate but to do so in the Middle East could mean establishing an office in the re-gion. Speaking to Alternative Latin Investor, one fund manager explained his location decision “We did a lot of research and I thought Bahrain was the best place to set up office. Firstly, the financial law in Bahrain is the strongest as it follows Anglo-Saxon law - So that’s very helpful. The second thing is the cost of living in Bahrain is a third if not less of what Dubai is and it offers a much higher standard of living. The third thing is its closer to Saudi. Its central all the GCC areas so its very helpful that way and finally fourth, its pretty easy to set up an office in Bahrain”. Ultimately, there is no substitute for com-municating the right message to potential new clients and our Middle Eastern source says it may take time but the rewards can be worthwhile “One has to realize that unfortunately the Middle East is completely relationship based. So they will have to put in a lot of work in terms of giving face time to the investors and you just have to come back. Ideal thing would be to have an office here and sit down and have a chat with them. Things don’t flow very easily for a couple of years but once you’re here for a couple of years and you’ve made some nice contacts and one investor comes in and then you’ll have a barrage of investors following – its just the first account that is the most important in terms of clinching the deal and after that you live off your first account basically”.

Hedge Funds

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Wine

Local EdgeThe

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In the real estate world the mantra is “position, position, position”. The same may be said for hedge funds based in Latin America. Proximity to the real action gives local managers an advantage over funds managed at a distance. We would not have said this in the mid-1990s when Latin America was an intense focus of investor interest in major financial cen-ters and there was a proliferation of emerging markets mutual funds. It was perceived that

the best perspective was achieved from a distance (on high?) looking towards the region form the northern hemisphere where one could observe matters without all the baggage that local investors and naysayers brought to the process.

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Wine

Local Edge Christopher Ecclestone - Portfolio Manager: since 2003 has been a principal at Hallgarten & Company where he has had the roles of equity strategist, analyst and asset manager. Prior to that he was the head of research at an economic think-tank in New Jersey which he had joined in 2001. He was the head of research at the esteemed Argentine equity research house, Buenos Aires Trust Company, from 1991 until 2001. This latter firm pioneered in-depth locally-generated investment analysis in this hitherto undiscovered market. The reputation of the firm spread through fund management circles and the firm became allied with Banamex, the leading bank in Latin America in 1993 and eventually Buenos Aires Trust Co formed an alliance with Interacciones Global in 1994. As part of the IGI structure he assembled the London sales team of the firm and built up the analytical team in Peru, Chile and Brazil. By 1997, IGI was the leading independent broking firm serving institutions investing Latin America. Prior to his arrival in Argentina, he worked in London beginning in 1985 as a corporate finance and equities analyst and later as a freelance consultant on the restructuring of the securities industry. He is a native of Melbourne, Australia. He graduated in 1981 from the Royal Melbourne Institute of Technology and is fluent in English and Spanish. Most recently he has been engaged on behalf of Hallgarten in conduct-ing due diligence and deal sourcing for two mining investment bank boutiques in New York.

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History ultimately came along to mug this school of thought, firstly in the mid-1990’s Tequila Crisis and then later on with the traumas of the globalised emerging market crisis of 1998 (ironi-cally triggered elsewhere in Thailand and Russia) and then with the Argentina crisis of late 2001. The people on the ground had been right and those “at a distance” had been caught wrong-footed. It was out of these debacles that the local hedge fund industry arose paralleling the rest of the world in what came to be known as the Decade of the Hedge Fund.

One can get too glib though on this subject for in reality the Latin “Decade of the Hedge Fund” was really more like half a decade (2003-2008) and it was overwhelmingly Brazil with little more than a token sprout-ing of hedge fund structures in other countries in the region. Nevertheless it can still be said that non-local LatAm hedge funds were almost as scarce. This is surprising for if there one industry that likes jumping on a bandwagon it is the hedge fund industry. Largely the outside players stayed away form region specific funds and the dabbling in the larger markets of the conti-nent was by the very largest mo-mentum funds from Greenwich who shoveled money in and out of Brazil and Mexico powered by the yen-carry trade. As we all know that practice came to grief in late-2008. Being closer to the action may have saved the locally based funds from annihilation as they were smaller and could trade more nimbly but still when the elevator cable is cut, all those in the elevator go down.

So the storm has now largely past and the questions arise as to whether the locally based funds will recover, whether they will retain their advantage over non-locally managed funds and how they might do this.

For us the main advantages that locally based funds have are:

Closer to the political and economic action/intelligence• Able to play in smaller or less visible names• Able to tailor their structures to the tax “needs” of their local • clienteleBetter able to avoid the tax dragnet now being swept by the • US and Europe through offshore havensBetter poised to tap the rising tide of local savings in the • regionCuriously, they have been relatively scandal-free, thus far, • in an industry which has had more than its share of trau-mas in recent years

We shall address some of these advantages. Firstly it undeniable that the local managers are closer to the action and have better intelligence sources. It has now been 18 years since Wall Street “discovered” LatAm and if anything the learning curve appears to be more of a parabola than anything else. In 1991 it was exotic and unknown with bets being placed upon hunches (and some filtered local gossip). By the mid-1990s there was intense study of the re-gion as everyone piled into the analytical game. By 1998 this wave had passed and the interest since then has been cherry-picking of stories that provide some excitement. This led to a situation where the distant observer could not see the wood for the trees. The

debacle of 2008 showed that the momentum players from afar did not know what they were doing, particularly in Mexico and Brazil. This was a “faith-based” investment style. The local funds may have played the same stock stories but generally knew the dangers, gossip and flaws or a particular corporate name and steeled themselves to dive overboard. This was a game of chicken in which they hoped that their nimbleness would help them escape before the bigger mo-mentum funds even knew there was a problem. The locals also rarely read the baby food served up by the foreign correspondents in the region as news. They had all the local sources at their disposal and, for better or worse, knew the real story of the political world and were cognizant of the

latest corruption scandal or its perpetrators.

This closeness to the action also meant that they were privy to the up and coming stories whereas those dependent upon Street research were usually only getting into nascent go-go stories after they had “got up and gone”. The boom in Brazil-ian REITs in 2007 was a particularly poignant example as was the very poor quality MercadoLibre that was dished up as an Argentine ADR and later plunged in value when its true value was divined by the marketplace. Likewise the Grupo Clarin listing in London promptly went over a cliff when it was real-ized that it was on the wrong side of the government of the day in Argentina. If anything ADR trading by local hedge funds was a means of trading against the foreign tendency, a varia-tion on “taking candy from babies”. The foreign investors were obsessed by their liquidity and jurisdiction mantras and clung to their ADR ciphers even when they were one of the worst ways of accessing the real economy in the markets they professed to be interested in.

If we need a reason for the spectacular success of the hedge fund model in the LatAm markets where they have sprung

In Mexico the public equities mar-ket has been held back by the failure to even approve equity

investments for pension funds, let alone anything so exotic as a hedge fund. However, if locally

based hedge funds were empow-ered to collect investments from individuals who were not HNWs

or from pension funds then there could be an exponential democ-

ratization of the hedge fund in-dustry in the region.

Hedge Funds

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up we need look no further than their “tax efficiency” for local HNWs. Hiding funds from the government has made LatAm economies what they are today. Light-fingered governments have been countered by the tight-fisted wealthy. Hedge funds have become the latest tool in this battle. It is possibly that Mexico and Argentina have the most history at hid-ing the wealth of the HNWs that hedge funds have not taken off there in their onshore version. In Brazil though a combi-nation of some savvy regula-tion and a certain realism in dealing with the problem of evasion meant that it was better for the Brazil-ian economy to have local money stashed in local hedge funds than having it whisked away to Switzerland to be recycled into Madoff-style in-vestment scams.

Likewise the lat-est crackdown on offshore havens by Western govern-ments makes life somewhat tougher for LatAm HNWs who live in fear of having their assets exposed to public view even if they are not avoiding the taxes of the jurisdictions that are conducting these witch hunts. Onshore solu-tions (read home-grown hedge fund in-dustries) for the tens of billions of flight capital would mobilize capital for domestic advance-ment (and infrastructure) much the same as has occurred in Asia.

The hedge fund industry around the world has only had a few windows of connection between the savings pools of the masses and that of the hedge funds. Primarily this has been the participation of public employee retirement schemes in allocat-ing a rising percentage of AUM to “alternative investment” categories. LatAm is way be-hind on this score. In Mexico the public equities market has been held back by the failure to even approve equity investments for pension funds, let alone anything so ex-otic as a hedge fund. However, if locally based hedge

funds were empowered to collect investments from individuals who were not HNWs or from pension funds then there could be an exponential democratization of the hedge fund industry in the region.

Finally, legislation to create and supervise hedge funds in the region

has been relatively light-touch thus far. Brazil again has

the best legislation and should serve as a

model for the rest of the region. As

usual though ridiculous nationalist pride con-siderations have held back oth-ers from follow-ing this lead. As a result the oth-ers have

been retarded

in their growth in this

category and have missed out

on developing the skillsets that come

from having a nascent industry and from the re-

tained (dare we say “trapped”) investment funds that can be mo-

bilized from the general evolution of local capital markets.

Thus in conclusion we would posit that locally-based hedge funds have a “smarts” advantage over the foreign based funds. Certainly they don’t have the ability to mobilize the

type of money that Greenwich can, but then again the region does not need brainless money flooding

in and out in tsunami tides as we saw in Brazil and Mexico in 2007 and the first

part of 2008. Like any tsunami they do more damage than good. Gov-ernments can harvest the industry for good or dissipate themselves in

struggling against the sheer Darwinian destiny of hedge funds. It is probably bet-

ter to join them than fight them.

Hedge Funds

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Wine

Steady in the storm with regional opportunities

Private Equity

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Wine

The nature of Central America with its small countries is dictat-ing that small or regional investments are attracting the most private equity interest. Mark Bishop from The Provident Group feels that the conditions investors have been waiting for are now becoming reality “Initially, back in our earlier days we did a lot of work in Central America ourselves. We were early in the game there. We thought there was going to be a lot more consolidation regionally. It looks like it’s becoming a lot more interesting now”. When asked by Alternative Latin Investor if The Provident Group would now be refocusing on the region Mark Bishop is optimistic but cautious “the problem with Central America was and remains, very fragmented economies, small markets and lack of experience with legal transparency –it makes putting capital in there just much more difficult. At the end of the day people are going to cherry pick - there is going to be a couple of selective opportunities but its still a difficult market to get your arms round”.

Aureos Latin America fund is the largest private equity fund in the region with over US$200 million under management between three funds. They are primarily a provider of capital for companies that are looking to expand or funds for manage-ment buy-outs. The majority of their investments are around the $5million dollar mark and Erik Peterson Regional Managing Partner Aureos Latin America says they see greater regional integration as the key to their strategy “we have a strong prefer-ence for companies that have the potential to become regional players. As you know there is a lot of cross border activity within the region, which is one of the reasons why we have selected this region. There are free trade agreements enacted with the US and within these regions. And so you have quite a flow of capital say between Colombia, the south end of Peru and north end of Central America and Mexico going south into the Central American region.

Mergers and Acquisitions have seen heavy activity in recent years but are now in a downward cycle that will present op-portunities according to Juan Carlos Rojas from Mesoamerica. Having been established in the region for over ten years, Mesoamerica primarily deals with a group of 15 private busi-ness groups in the region. Rojas says after initially operating a general fund they have refined their strategy for the region “We moved towards industry specific SPV’s instead of manag-ing a general fund. And this was mainly because we started on licensing vast opportunities in specific sectors. We launched an investment in telecommunications, raising some US$ 200 million dollars in commitments from our investors and did a joint venture with Telefonica to develop telecom in Central America. We exited that deal in 2003. We created Mesoamerica Energy, which is a company that develops and operates wind power plants in Central America. Basically our strategy is that we do not manage a fund. We have no real need or pressure to be diversifying and be investing – committing funds. We are very picky about the opportunities – it has to be certain types of industries and opportunities that have certain type of scale. We look to be investing US$50-100 million or more per deal”.

The M & A sector in Central America has seen some large scale activity with Citi Bank, HSBC and GE money moving into regional banking and Telefonica, Telmex and Cable & Wireless now operating in Central American telecommunications. Up to US$30 billion has been spent by multinationals on M & A’s in the region but with many now wanting to protect their core business in the present climate. Rojas doubts such activity will continue in the near future thus creating distressed opportuni-ties “I think that in our region many multinational companies are going to be faced with, over the next one or two years, the decision to basically spin off their Central American operations - and that may make opportunity to invest in corporate orphans.

After a decade of steady growth Central America is weathering the global financial downturn comparatively well and continues to offer regional opportunities for private equity. Historically, this small, diversified region has suffered from armed conflict, political instability, weak institutions and a lack of legal frameworks and enforcement. However, stable democratic governments allied with disciplined fis-

cal policies brought an unprecedented period of growth in the past decade with steady growth rates on average above 5%. According to IMF figures from 2006 Central America with 5.5% Real GDP growth was second only to Latin America and the Caribbean with 5.9%. Through inter-views with some of the main players in the region Alternative Latin Investor has found that in addition to the countries within Central America nations such as Mexico, Colombia, Peru and Ecuador are increasingly becoming of interest to private equity investors looking for more re-gion wide plays as opposed to focusing on a particular country. Peru and Colombia have been and are two countries that have demonstrated stability in fiscal terms for Peru and with internal security matters in Colombia.

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Private Equity

Spinning off their Central American operations creates a great opportunity for local groups to buy and then once the economy picks up again you’ll see them coming back in”.

Venture Capital and stock markets within the Central American region play little or no role in attracting private equity. According to a 2008 IMF report “several Central American equity markets are severely underdevel-oped. There are no equity markets in four out of the seven countries (Guatemala, Honduras, Nicaragua and the Dominican Republic), and markets are small and shrinking in the other three (El Salvador, Costa Rica & Panama). At the end of 2006 there 88 equity issues listed in the Central American region”. Roberto Zeleya, partner at Batalla & Asociados in Costa Rica, says there are attempts to address this hole in the private equity market “We have a

vacancy in venture capital because there are no funds invest-ing in start ups or new projects. What we have is some efforts to try to establish an Angel investor community here in Costa

Rica. Those are institutional efforts which were initially funded by TAMIS, which is a multi-lateral development fund by the Inter-American Development Bank and by the CAD, Corporation Andino de Developmento. They funded the first stage of Link inversions which basically put together a web of angel investors in Costa Rica trying to invest in new companies.”

Whilst the lack of significant venture capital is a real chal-lenge for growing business in the region, funds focused

on SME (small, medium enterprises) do offer a focus on smaller investments in an area that Zeleya says has seen strong activi-ty “SME’s – that invest up to 3 million dollars have made a lot of

“They have recently enabled regula-tion that would allow them to invest outside. In the case of Colombia it allows a Colombian fund to invest

outside of the Colombia region. And in the case of Peru they’ve recently

authorised Peruvian pension funds to invest outside of the region as

long as they are essentially qualified and registered private equity funds”.

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Private Equity

investments in this past couple of years. They engage in trans-actions from 500 thousand dollars to 3 million dollars and there are two of those funds operating in the region. One of those funds is Emerge Central America growth fund that is managed by Aureos Capital and the other one is CASEIS Corporation Two Limited. That is a second generation fund managed by LAFISE investment management, based in Nicaragua”.Central American pension funds have a negligible impact on private equity though recent changes to regulations in Colom-bia and Peru are allowing for increased activity. Many pen-sion funds in the region are limited in terms of where they can invest, either not being able to invest in private equities or only being allowed to invest exclusively in their own region. How-ever, Aureos Latin America fund reported to Alternative Latin Investor that changes to regulations are slowly opening up possibilities in Colombia and Peru “They have recently enabled regulation that would allow them to invest outside. In the case of Colombia it allows a Colombian fund to invest outside of the Colombia region. And in the case of Peru they’ve recently au-thorised Peruvian pension funds to invest outside of the region as long as they are essentially qualified and registered private equity funds”.

Direct foreign investment in Central America is dominated by US capital according to the sources Alternative Latin Investor interviewed. Rojas observes that whilst the US is providing the bulk of DFI’s there are new trends emerging “We are very tied to the US and I would say most FDI – 60 to 70% comes from the US. Nonetheless there has been more and more FDI from Mexico coming in. Its Mexico’s back yard and now Colombian investments are coming back up. Also the Spanish invest with Telefonica although the Spanish banks have not come in yet. So its primarily the US, Mexico, and Colombia. Europeans somewhat though not so much.” Bishop also noted some interest from the Middle East but with more of a focus on Latin America as a whole “Where we see interest is not in certainly in the hydrocarbon and the farm sectors. With the issue of food security a number of groups have targeted growth crops and cattle operations”. In focusing more on Central America, Aureos have attracted a diverse group of investors “We have a strong mix of development financial institutions and multi lateral institutions so we’ve got many of the well-known institutions that are generally seeking to provide capital and invest in emerg-ing markets, particularly in mid sized and the S & B segment of emerging markets. With this fund we’ve also included some capital from private sector investors – US private investors – and more recently we have raised capital from some Colombian pension funds and insurance companies”.

Regional stability and new growth countries such as Colombia and Peru look set to be the main drawing points for private equity investors to Central America in the future. Erik Peter-son from Aureos sees Central America maintaining a steady if unspectacular course in the next ten years “CA countries are rather small so they tend to fall in margins of places that inves-tors are looking to invest in. Yet at the same time they are con-sidered relatively stable locations with some exceptions. I would

expect this to be the trend going forward as well that they are not going to be a focal point for investors, yet at the same time the region as a whole is considered a relatively stable region to invest in”. Even though groups such as Aureos and Mesoamer-ica currently dominate private equity in the region Mark Bishop thinks there is an opening for competitors “Id say there may be more room. The things people are focused on are some oil and gas plays, there are the housing plays and financial services plays. Aside from that there aren’t many other sectors that are that interesting. There may be room for another couple of funds. I think what Aureos did, they are already moving into a more regional approach so its basically Central America plus Colom-bia and Peru, so I think people are realising that - people are taking more of a regional view instead of being Central Ameri-can focused”. Whilst the current crisis hasn’t affected Central America to the degree of other regions as yet Roberto Zeleya of Batalla & Asociados, believes if the right direction is taken they will emerge stronger “being such small economies we depend on foreign trade for growth. The external demand for exports would be a very important factor or conditioning element in our recovery. I would say that we could navigate through this fairly unscathed if there is creativity in the business sector in the re-gion looking for alternative markets or our own internal market. If we continue to rely on traditional markets such as the US or to some degree Europe – we are going to be pegged to them”.

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Forex

in Foreign Exchange markets?

These ‘major’ markets have always been perceived to be ostensibly positioned, able and more importantly willing to pave the way forward for the future growth of other vital yet (relatively speaking) pe-ripheral markets of Latin America, at least from the standpoints of market pricing and available orderliness-it seems clear that any further jeopardy to overall stabil-ity is both counterproductive-and risky-for all involved.

Past perceptions of mainstream markets much like many traditional economic views are now (perhaps rightly) being challenged by evolution and hard evi-dence that all is not as well as previously thought. Importantly, with the perma-nent era of ‘global village’ economics & co-operation now entrenched in modern psyche, the weightier issue for LatAm is that the lurking threat that negative implications caused by slowdown and systemic failure in established economies may not yet have run their full course

Whats behind the moves

Since August 2007, sporadic volatility and price turbulence witnessed by FX markets in the ‘established’ global market place have seen conventional wisdom & percep-tions consistently challenged in unpredictable fashion, with wild swings in daily currency trading ranges raising questions on whether the giant pools of liquid-ity traditionally offered by the G-10 countries are of sufficient depth & maturity to

withstand such constant barrages that may lead to more actual and potential systemic financial shocks.

globally. This potential contagion factor & danger manifested itself in recent cur-rency fluctuations, with LatAm currencies bearing the brunt of much pain, fear and concerns for continued global economic weakness. Most traded LatAm currencies were ultimately hit negatively by around 50-60% against in their best-to-worst valuations over the past year or so.

Such price action, severe both in the reality of its emergence & eventual vorac-ity, does in turn raise questions of the ex-treme market valuations & their ultimate validity, given that markets always over-shoot; can such negativity be truly justi-fied and consequently is it of any use as a material guide to the future outlook for continued progress and economic expan-sion in the Latam region? If the markets are simply too negative, there are some great opportunities on the horizon for currency plays, assuming a level playing field. If the markets are right and we have had only a brief taste of the fireworks to

come, then being prepared for a wild ride ahead could be a wise course of action.

Whichever way the USD or other major currencies affect LatAm currencies, one constant is that no matter how buoyant or impervious economies appear to be, no currency is truly immune from the ever-evolving ability & need of global macro players to move capital quickly around the world. Who would have expected the Swiss National Bank to announce a policy of weakening their Franc (CHF) during the midst of one of the biggest global meltdowns in living memory, particularly when uncertainty had been encouraging the masses into CHF as a traditional ‘safe-haven‘-FX markets seem to thrive on irony.Uncertainty has been most pronounced when extreme price action is caused by the prevailing factor of positions being closed out reduced to a particular geo-graphic region, thus diminishing or even negating the need for price sensitivity

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and subsequently leading to an over-shoot in price. In Forex markets, this is a noteworthy yet counter-intuitive develop-ment, given that sensitivity to available pricing has traditionally been the very life-blood of FX market participants, trading in large amounts at miniscule margins, with little room for error and quality and width of spread or price dictating who gets the deal.

Almost two years of some uncharted market gyrations have resulted in sea-soned quantitative traders constantly reassessing and in many cases rewriting their trading models due to the habitual development of currency ranges defy-ing logic, in many cases departing from the most liberal allowances for ‘standard’ deviations.

As we enter the second half of 2009 and with it the second anniversaary of the origins of the credit crisis, markets continue to seek some kind of equilib-

rium as volatility levels remain calm yet heightened by historical measures; the crucial question for many as they assess exposures into the second half of this year becomes “If this is the new normal, how will I deal with it?”

This of course remains to be seen but if every cloud has a silver lining and with such an uncertain or cloudy outlook ahead, perhaps at this juncture it’s impor-tant to consider the valuable lessons that have been remembered by experienced professionals as well as learned by novices, respectively, due to the heavy doses of reality recently seen.

Losses and profits of the credit-crunch may have been consigned to history but their legacy may help all market par-ticipants when planning for the future. Ensuring that simplistic yet fundamental governing factors are respected will help many cope with future uncertainty. This could be as simple as respecting

guidelines where risk exposure does not exceed appetite & maintaining a pre-defined exit route in all strategies; two of the most important facets of managing any asset class efficiently (and profitably) but particularly in Foreign Exchange, as evidenced by vulnerability to recent swings in rates.We will remain forward-looking by engag-ing in debate on contemporary strategies and viewpoints from around the financial world, touching on the many facets that drive currency valuations. For example, FX Options have been very popular in 2009 so far, but with volatility dropping off the price of decay paid for protection now seems high to buyers, an insurance perhaps un-necessary. Easy to say in hindsight, but of course in 2007 and 2008 many fingers were burned by very poor mismanagement of downside or negative risks, which mani-fested itself through the unwinding of short Japanese Yen (JPY) positions that led to the end of the carry trade regime. Besides, who knows what’s around the next corner-

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the world, or at least perceptions, can change very quickly.

As always in FX, the efficient timing of entry and exit levels will remain abso-lutely critical, being one of the issues foremost in the minds of professional currency traders and managers of both market risk and of assets, yet also one of the hardest to achieve.Other governing factors will include the participation level, actions & strategic execution of central bankers and govern-ments, as well as what peers in these decision-making groups will ultimately decide when actioning their own strate-gies, driving future capital flows and directly affecting, to a degree, future cur-rency rates.

The abstinence or involvement of Hedge Funds is another ingredient to the mix, many such entities are widely rumoured to be in “stealth-mode“, boosting their personnel numbers by luring bank traders away from environments where performance-based bonuses will be capped due to reliance on governmental capital.

It will be interesting to see whether previ-ously viable strategies such as the ‘carry trade‘ will remain a realistic FX tool in an environment with so many variables now converging (interest rates) and others di-verging (traditional correlations) simultane-ously. With so many low-yielding currencies now to choose from, the carry-trade seems

destined for failure with the underlying risk that Western Central Banks will remove stimulus quickly and efficiently as soon as their economies stabilise, due not least to the threat of inflation.

Some schools of thought say that volatility is here to stay, with the single-digit levels of early 2007 becoming a distant, almost surreal memory. Other ‘old‘ approaches to currency risk are now under scrutiny and include arguably defunct tools such as trend-following and mean-reversion, defunct perhaps simply because of the large amounts of time & pattern recognition (for example several weeks and/or 5 or 10 cents) now needed to establish & confirm a trend. In the good old/bad old days, such moves would have been all over very quickly and actual profits booked on any result-ing trade.

Many folks are now leaning towards tech-nical analysis purely because, in theory, everythng is already embedded in the price-it is what it is.

Finally, at least for now, we expect a differentiation to emerge between “trend‘ and “macro“ players-often mistaken for the same thing but we expect discerning market observers to identify and make distinctions between the two quite clear over the coming months, as the crisis unfolds and hopefully brings new oppor-tunities.

Kevin Sollitt gained international FX trad-ing experience in various financialcenters including London, New York, Los Angeles, Sydney, Hong Kong & Tokyo.Kevin’s career began in London during the 1980s, later transferring to Sydney.In the mid 1990s he returned to London under the challenging financial conditions of that era, experience that equipped him to successfully deal with more recent turbulent market conditions.

In 1998, Kevin teamed with former col-leagues at a super-regional bank in the U.S.A. and through strategic alliances, development of professional relationships & continuous positive trading results, be-came Head of Foreign Exchange Trading in 2006.

Kevin’s market longevity is due to an entrepreneurial nature & the ability to provide innovative currency strategies. These are complemented by an impres-sive network of financial marketprofessionals that result in a compre-hensive, contemporary grasp on world currency markets.

Finally, a brief look at conventional wis-dom, awareness of geopolitical factors & analysis of fundamentals that may not be widely discussed in the mainstream can be combined in any forecast. This month, we attempt to do just this by taking a macro view on the current outlook for the three major currencies of Latin America; Argentinian Peso (ARS), Brazilian Real (BRL) and the Mexican Peso (MXN), including with it a brief history of recent ranges:

Forex

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ARS █

Last 12 months inter-bank range 3.0453-3.7250, currently 3.7200; forecasts:

Following the argentine elections, some commentators suggest risks to the up-side in inflation may emerge, which could undermine the currency-as it has done historically. The deterioration in the FX rate seems justifiable to a point given the increasing probability of impending reces-sion. That said, Argentina is well-placed given its efficient farming and food-production methods and may surprise many observers if North American food production falters due to uncooperative weather patterns or the possibility that farmers did not have access to enough capital caused by the credit crunch to buy & plant seed, leaving a potentially huge gap in the food supply chain.

Following the elections we see scope for some political unrest we are not as bear-ish on the unit as some commentators steadfastly remain.

Q3 2009 Q4 2009 Q1 2010

3.4550 3.7800 3.2850

BRL █


The Brazilian government is implement-ing measures to aid the central bank in helping the economy during 2009. The latest measure was a drop in the estimated primary fiscal surplus as a percentage of GDP to take into account the slowdown in economic activity as well as to have more degrees of freedom to conduct a more active fiscal policy. Brazil is arguably the best-placed among the three nations discussed here with inflation well under control by historic standards (6%), unemployment of only around 4% (Argentina 10%) and GDP in the region of $1,500 bio, 50% greater than Mexico’s and 5 times as large as Argentina. Due to the contraction of the worldwide vehicle market some down-side economic risks remain, but we see a macro trend in place here of a gradu-

ally appreciating Real as Brazil proves itself competitive and nimble on the world stage.

Q3 2009 Q4 2009 Q1 2010

1.9900 1.8100 1.6400

MXN █


Considering that MXN is one of the most liquid ‘emerging‘ currency pairs available to trade, it underwent one of the largest market-induced depreciations from the end of last summer at its best point to early 2009 at its worst, moving from just under 10 MXN to the U.S. Dollar (USD) to around 15. An almost 50% devalua-tion of this nature reflects what have now come to be seen as various fundamen-tals:

Finance Minister Carstens forecast • economic contraction by a little over 4 percent in 2009 from 2008.Failure or complacenecy to efficiently • hedge Oil receivables as the price of crude collapsed from $150 to $35 resulted in financial pain, revealing poorly-managed negative exposure to such a fierce decline (state-owned oil industry contributed around 3/8 of total government revenue in 2008).Closure of schools & businesses • during the recent outbreak of swine flu reflected latent concerns over Mexican infrastructure and its abil-ity to manage critical health issues effectively, possibly affecting future tourism revenue.Lowering of credit ratings by one • agency (Standard & Poor’s) from negative to stable in May 2009.Industrial Production in both manu-• facturing and construction is sliding.Interest Rates have been reduced • from 8 percent in line with falling inflation to 6 percent, reducing the support that had compensated inves-tors for currency risk.Mexico’s export market is the United • States & the Central Bank predicts a current account shortfall doubling to around 15 billion USD from 8 billion

USD in 2007.Immigration & drug enforcement • policies are bones of contention for investors.

Positively, Mexico seems to be aware of its problems and recently secured a line of credit from the U.S. Federal Reserve & a $47bio flexible line of credit from the International Monetary Fund. The price of crude also touched the $60 mark again in May, underscoring demand as the global economy stabilizes at the end of the sec-ond quarter of 2009. Bottom-line, there is a lot of bad news ‘in the price‘, but it will most likely be a long recovery peppered with problems given the gloomy backdrop and lack of diversity in the economy, before a retest of the highs of 2008 can be seen again.

Q3 2009 Q4 2009 Q1 2010

13.2000 14.1000 13.2000

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For most institutional investors (other than the ones with dedi-cated staff) the execution of their foreign exchange (FX) is an afterthought. Unless, you have been trading global securities for some time and you are comfortable with the magnitude of the market’s volatility.

When there is the need to purchase or sell currencies for the purpose of hedging or funding a primary trade, foreign ex-change becomes a derivative, a secondary trade. A derivative that’s not as important to their primary investing objectives. There are investors that do not have a dedicated team to follow the currency market and are willing to give up the trades to their custodian, equity or fixed income salesperson to execute on their behalf. The assumption is that they do not have the man power to closely monitor this particular market and therefore it’s cheaper to give it to their primary coverage salesperson to execute via their FX desk. Some go even further by contracting their custodian bank to execute on their behalf via their internal FX desks.

Many years ago, when institutional investors invested mainly in domestic securities there was no need to worry about the FX market, even later on when diversification meant just to invest in a handful of countries. But nowadays, when almost every investor is looking for global diversification there is an inherent need to go abroad and to participate in many more countries. Additionally, the globalization of the financial markets has meant a greater correlation between nations and currencies;

therefore you might need more of them for your diversification. And nowadays, FX is perceived by many to be an alpha gener-ating asset class.

Other than calling your local bank/broker what are the alternatives and what else do you need to consider? Well, first and foremost you need to be aware of trading risk, and what I mean is the exe-cution of FX by people unaware of the intricacies of this market (in other words, the execution by non-FX traders). A way to mitigate some of the risk is by utilizing electronic trading platforms to help you monitor your execution. The benefit is that it’s not necessary to have a dedicated person to execute your FX; the volume will dictate when you need to hire someone. In the mean time, any of the traders executing international equity or global fixed income can be paired with a web based platform to execute your FX. How do you know you are getting the best rate (price discovery)? Well, let’s remember that the foreign exchange market is the larg-est market in the world ($3.2 trillions a day), it still is an over the counter market and it lacks an official central clearing institution. Last month’s Greenwich Associates report showed that electronic FX trading increased from 44% in 2007 to 53% in 2008, that’s a 37% increase year over year versus the 13% increase in total FX trading volume. So what are the options? The most liquid time to execute FX is at the time of London’s closing because New York is already open, before 11:00 AM EST. There is a synthetic bench-mark called the “11:00 fixing.” You can request to be executed at that time, therefore ensuring that you will be executed at the most commonly know “benchmark” of the day.

This piece is intended as a primer for institutional investors new to the foreign exchange market. This market is very complex and its participants and their needs sub-

stantially differ from one another.

Alternatives for executing Foreign Exchange for Institutional Investors.

By Francisco J. Heredia | Boston Global Associates █

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Francisco Javier Heredia has 20 years of global financial mar-kets experience. Most recently he served as Vice President at State Street Global Markets’ Global Link, core e-commerce offering spanning multiple asset classes, including: domestic and international equities, money market instruments, foreign exchange, listed derivatives and fixed income securities. Prior to joining Global Link, Mr. Heredia was a Fixed Income Spe-cialist with State Street Global Markets’ Bond Connect, a reg-istered Alternative Trading System engaged in providing fixed income trade execution services for institutional investors. He

also served as a Quantitative Fixed Income Analyst at Putnam Investments. Prior to that he worked in Chile for Bankers Trust’s Consorcio Nacional de Seguros as a Financial Analyst and he is a licensed member of the Santiago Stock Exchange. Before returning to Chile, Mr. Heredia began his career as an Assistant International Analyst at Harvard Management Company. He holds a Master of Science in International Finance from Bran-deis University and a BA in Finance, International Business and Management from Northeastern University. Contact at [email protected]

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Source: BIS Triennial Survey 2007

One item to consider while evaluating platforms is to determine how often you will need to trade FX, if this need is more than a few times a week you should consider ways to automate this process. For example, where do the amount and the currency to trade emanate from? Is it produced by an in-house system? Do they get calculated in Excel? One you determine the source of this information you can easily create an export file that many of the trading platforms can import and begin to create a straight-through-process to integrate and mitigate input errors.

There are many competing offerings out there; single-dealer platforms and multi-dealer platforms, most banks offer their own platform to their clients (single-dealer), there are Request For Quote (RFQ) and Dealable Prices platforms and many of them offer many iterations of these alternatives. Remember that dealers (banks) want your trade and they will accept it however you send it, therefore it’s your choice how you decide to execute. Most platforms also allow you to trade in competi-tion, therefore giving you a greater level of liquidity as opposed to just trading electronically with your custodian or with just one bank at a time. Yes, there are many ways to trade FX and you have to determine the most suitable style to your needs. For example, do you need to trade spots as well as forwards or just spots? At what time of the day to you know your trading needs? Is it more than once a day? Do the (funding) numbers change during the day? Do you need to match your primary trade’s settlement date? Please remember that equities and FX trades can settle at different dates. What about dealable prices? Yes, there are platforms that offer this service but are more expensive and are designed for professional traders and require a Prime Broker. Another alternative would be to outsource your FX execution to a professional institution that would deliver the 11:00 fixing for example, in exchange for ex-ecuting at their discretion in search of Alpha to share. Basically, allowing a professional to trade for you for a fee.

Once the trade is executed, then the next step is to confirm it with the dealer. Enter confirmation risk; what happens when you send a fax to the back office of your counterparty and they do not agree with your information, or if they do not respond until 4:30 or even later. All electronic trading platforms have a confirmation piece that will help you mitigate the confirmation risk by transmitting the traded information directly to the back

office system of your counterparty. The ideal situation is that no one will be able to manipulate the traded information. Then, you must notify your custodian, assuming that you did not trade with them, this can be accomplished by sending a SWIFT mes-sage with the trade information and the delivery or acceptance instructions for the cash movement. This process is also very important because, again it helps mitigate the settlement risk.

Continuing with the process, the best alternative to completely eliminate settlement risk would be to have all trades settled in a centralized clearing entity and so far the only institution offer-ing some form of this concept is (Continuous Link Settlement) CLS Bank. An institution based in Switzerland that begun in September of 2002 as a response to the collapse of Bankhaus Herstatt, a German bank that authorities shut in 1974. CLS Bank offering is in simple terms much like what DTC does for equities. Today most banks, dealers, and custodians are mem-bers of CLS Bank and are able to settle daily by crediting and debiting their accounts at CLS Bank.

“CLS Bank provides the largest multi-currency cash settlement system, eliminating settlement risk for over half the world’s foreign exchange payment instructions. Owned by the foreign exchange community, CLS delivers greater operational efficien-cy when settling payment instructions related to trades execut-ed in six traded instruments and in 17 major currencies. CLS Settlement is the only means by which settlement risk can be eliminated with finality using a unique combination of payment versus payment in central bank funds, multilateral payment net-ting and a standard legal framework, supported by a robust and resilient infrastructure.“ From CLS Bank’s website.

If your custodian bank is not a member of CLS Bank they can arrange to be sponsored and send their trades via a member bank.

So what if you traded a currency that is not CLS eligible? Then you are responsible for communicating the settlement instruc-tions between your counterparty and your custodian, this is a risk that should reside between the custodian and the coun-terparty (dealer) not on the investment manager. Some of the electronic platforms do offer ways to curtail some of the risk but require cooperation among all your enablers (dealers and custodians).

In Summary and most importantly, if you need to trade FX I would encourage you to trade electronically so that you could, in fact reduce your trade, confirmation, and settlement risks while automating the process. Select a platform that meets your trading needs, reach out to other market participants and ask them to share their experiences, look for integration to your systems and straight-through-processing (STP); seek to clear via CLS Bank if possible. There are steps to take and alter-natives to consider, the outcome will depend on your trading needs.

“CLS Bank provides the largest multi-currency cash settlement system,

eliminating settlement risk for over half the world’s foreign exchange

payment instructions.

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Agribusiness Opportunity

in Latin America

Agribusiness Opportunity

in Latin America

Latin America is home to hundreds of farming coop-eratives and small regional growers associations. Often these cooperatives and associations are home to as much competition as cooperation. This represents a challenge when growers seek access

to export markets for their produce. It also represents an op-portunity for development that will create sustainable growth in the agribusiness sector.

Mexico’s proximity to the USA, coupled with its climate and the availability of low-cost farm labor, make it a logical source for meeting growing fruit and vegetable consumption in the USA. The value of U.S. agricultural imports from Mexico is roughly equal to the value of U.S. agricultural imports from all S. Amer-ican countries combined. (Source: USDA Market News)

By Stephen Kaczor

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Orange Case Study █

Development banks are willing to invest in infrastructure to sup-port export market development for agribusinesses. Nacional Financiera, S.N.C. is currently working on such a project with Mangazo SA de CV for exporting oranges from Mexico’s Baja California Sur. This orange project provides a good template for considering opportunities across Mexico. BCS growers are selling their oranges domestically rather than exporting them to the USA where willing markets await with citrus prices ten times higher than Mexico’s.

In order to take advantage of this attractive price multiple, small growers in the region need to cooperate and invest collectively. They need more than physical infrastructure such as a USDA-certified packing shed with cooling and sorting equipment and country-of-origin labels with the proper price look (PLU) numbers and bar codes used by retailers in the USA and other countries.

Exporters also need marketing representatives in export mar-kets to plan promotions with retail merchandisers, point-of-sale materials, pricing quotations to be provided five weeks in ad-vance to retail buyers along with volume and sizing forecasts, steady supply through the entire season, reliable freight provid-ers to deliver on-time, and analysis to ensure the produce arrives at the retailer’s warehouse with the desired shelf life for distribution to stores.

Mango Case Study █

With the proper physical and professional infrastructure, export programs have been very profit-able. A case study which provides valuable insights into agricultural exports opportunities in Mexico is the mango crop. Prior to Nafta, mangos were exported to the USA through produce brokers in Florida, Texas, Arizona and California. These produce brokers maximized the price to retailers, mini-mized the return to growers, and pocketed a very hefty profit given their minimal value added.

In 1994 a program was implemented by International Market Resources with Mexico’s largest mango grower, Agroproducto Diazteca SA de CV of Sinaloa. This was the first time retailers in the USA imported mangos directly from the grower. Within eight years, annual sales for this single grower increased 400% and 80% of the company’s crop was sold directly to retailers in the USA. By eliminating the middlemen, the grower was able to increase profitability, project consistent growth, and decrease bad debt expenses. The opportunity is realized when grow-

ers are given the tools to manage export sales. This involves retaining marketing representatives rather than brokers so that control rests with the growers, creating relationships with USDA staff and third party certification agencies, building relationships with retail procurement professionals for planning future yields, pricing, and varieties, investments in an export packing facil-ity, and implementation of phytosanitary measures from the orchards and fields through final delivery to customers.

Success Stories █

The Fresh Produce Association of the Americas is a bi-national organization based in Nogales, Arizona which has benefitted many growers and crops in Mexico. It success stories include beans, bell peppers, chilies, cucumbers, eggplants, grapes, limes, mangos, melons, squash, and tomatoes. The majority of fresh produce consumed during winter in the western USA comes from Mexico through Nogales, Arizona.

Stephen Kaczor is a Seattle-based writer, entrepreneur, and market development consultant. He recently founded Changes In Latitude to help travelers explore Latin America and he is a partner at International Market Resources. In addition to

consulting and writing, he is passionate about travel, Latin American culture, and sustain-able agriculture. Steve has served as Chairman of the Bor-der Region Business Incubator, Associate Professor at Western International University, and on the Governor’s Arizona-Mexico Commission.

Some of these commodities, like tomatoes, benefit from econo-mies of scale enjoyed by large multinational companies. Some commodities are still distrib-uted primarily through produce brokers at the border. More growers are setting up their own

distribution operations in the USA. However, many opportuni-ties remain for regional grower cooperatives and associations to develop export markets on behalf of their members.

Organics █

One of the most promising areas for is organic produce. In Latin America, Uruguay has the highest percentage of organic farm land – much of it in urban areas. But Uruguay is not close enough to the USA to maintain a low carbon footprint for agricultural exports. Organic consumers are very interested in regionally produced foods.

“The value of organic produc-tion in 2000 was $150 million from Mexico, five times great-

er than Argentina’s, which puts Mexico second only to

Brazil in total value of organic production in Latin America”,

according to agriculture re-searcher Don Lotter from Da-

vis, California.

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Within eight years, annual sales for this single grower increased 400% and 80% of the company’s crop was sold directly to retailers in the USA.

production value in Mexico. Since it is far beyond the abilities of a producer of that size to seek individual certification, certification is done by farmer groups and cooperatives”, states Lotter.

The Opportunity █

The opportunity exists for investors in regional grower coopera-tives and associations to provide the infrastructure and profes-sional development required to build export sales directly to Fortune 100 retailers and quality wholesalers in the USA. With the proper infrastructure and marketing, growers in Mexico can create profitable long-term relationships with the organizations that retail fresh produce in the USA.

In 2000 Mexico placed 16th in the world and fifth in Latin America for organic land under production. Unfortunately, Argentina’s 3 million hectares certified organic includes unmanaged range land, so the statistic is misleading. “The value of organic produc-tion in 2000 was $150 million from Mexico, five times greater than Argentina’s, which puts Mexico second only to Brazil in total value of organic production in Latin America”, according to agri-culture researcher Don Lotter from Davis, California.

Mexico’s domestic demand is still small; however, the value of organic production in Mexico is expanding at twice the rate of the USA’s. Coffee is Mexico’s largest organic crop. Buying organic coffee from Latin America helps small rural growers more than most foods you can buy. “Over 50,000 small farmers, with an average holding of 2 hectares produce over two-thirds of organic

Stephen Kaczor is a Seattle-based writer, entrepreneur, and market development consultant. He recently founded Changes In Latitude to help travelers explore Latin America and he is a partner at International Market Resources. In addition to consulting and writing, he is passionate about travel, Latin American culture, and sustainable agriculture. Steve has served as Chairman of the Border Region Busi-ness Incubator, Associate Professor at Western Interna-tional University, and on the Governor’s Arizona-Mexico Commission.

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Wind Power Investment BlowingTowards ChileBlowingTowards Chile

Wind Power Investment

The combination of pro-renewable en-ergy legislation, economic stability and industrial demand are fuelling a vibrant wind power sector in Chile. The Latin American nation has limited indigenous

energy resources, with the exception of hydropower. As a result, the country must import the bulk of its energy needs. Up until 2004 Chile met most of its demand for energy by importing natural gas through an agreement signed in 1995 with neighbouring Ar-gentina for them to supply 22 million cubic meters a day. However, subsidised energy prices in Argentina boosted domestic demand there, which consequent-ly saw exports to Chile fall drastically.

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Wind Power Investment Blowing Towards Chile



Currently Argentina is only sending 10% of the agreed quantity of natural gas to its Andean neighbour. Faced with an energy crisis beginning to impact upon economic growth, Chile was forced to scour the globe for energy sources says Eugenio Chinchon, a Chilean business development manager special-izing in renewable energy “Chile provides most of the copper in the world. As China has been booming and asking for a lot of minerals, the price of copper has gone up. So they want to produce more but because there is a shortage of energy, they couldn’t produce. Also because of historical reasons we don’t have natural resources to produce energy in the north, and the only way to produce has been gas. But we don’t have gas, so we must buy it from other countries. Our neighbours like Peru and Bolivia have a lot of gas, but because of historical rea-sons, there is a lot of rivalry and they don’t want to sell us gas. So Chile has to buy liquid gas from the Far East and it’s very expensive. So the prices are going very high and the Chilean government wants to have wind energy”.

The reduction in Argentine exports of natural gas prompted an energy policy rethink in Chile and a firm commitment by its Government to diversify its energy sources. Legislation signed into law by Chilean President Michelle Bachelet last year requires that electric utilities invest in and supply non-conven-tional energy sources. The law is an attempt by the energy poor

country to diversify supply as it tries to feed booming industry, particularly its copper mining sector. The law mandates that NCES account for at least 10% of the energy supplied by Chile’s electric utilities by 2024. Upon signing the law Bachelet said “the main idea is to establish conditions to attract invest-ment to projects for non-renewable energy by accelerating the development of the market, eliminating entry barriers making those new sources compatible with the country’s electricity market”. Historically, up to 75% of Chile’s domestic energy production came from hydroelectric projects which are mainly located in it southern regions. However, recent droughts in the region have exposed unreliability in this renewable energy source (rain at the end of 2008 did restore hydroelectric energy production capacity). Energy diversification has thus spread to different potential sources. Geography has been kind to Chile with regards renewable energy sources. With many active vol-canoes in its southern Patagonian region, geothermal energy is pursued as is tapping into the solar energy potential of northern Chile, where year-round clear sunny skies provide some of the best conditions in the world for this form of renewable energy. Hydroelectric capacity is set to be increased with GDF Suez building at least six new hydro plants in southern Chile, but GDF is also one of many companies now entering Chile’s excit-ing Wind power sector.

Renewable Energy

30

Chile’s status as having the most economically liberal economy in the region is making the country a magnet for alternative energy investors seeking a foothold into the whole of Latin America. According to the Index of Economic Freedom, jointly pro-duced by the Wall Street Journal and the Heritage Foundation, Chile cur-rently ranks 11th in the world and is number one in Latin America when it comes to having estab-lished economic free-doms within the workings of the economy. Eugenio Chinchon a Chilean who advises European companies on setting up renewable energy operations in Chile told Alternative Latin Investor that his country has had an open energy market for many years “The electricity market in Chile has been completely liberalised since 1982. It was the first country in the world to do so. That means for renewables, that in order for them to compete with electricity they have to do it on the same terms.” However, Chinchon says that having a free market energy sector can make it difficult for renewables to compete unless market conditions are favourable “The only way to help the renewables is the Chilean government forced the electricity generators to have a 5% share of their electric-ity coming from renewables (this will rise to 10% by 2024, as earlier mentioned). And if they don’t comply with that they have to pay a penalty. At the moment it is cheaper to pay the penalty, however, having said that, at the moment Chile is hav-ing energy problems because the price of energy is based on market rates and now there is a shortage so now the prices are very high. Even with the competitive market its good for re-newables now”. Whilst conditions in the Chilean energy sector may currently be attractive Eugenio Chinchon believes we are witnessing alternative energy investment strategies with an eye on the whole region “I know there are many companies who are interested in Chile in particular for many reasons. They want to use Chile as a platform for the rest of South America. Because the market is not that big in Chile, it is not that attractive for that, but you can set up your headquarters and you are assured that you are not going to have problems. You are going to have less risk than in other countries such as Argentina or Brazil or even riskier countries such as Bolivia or Peru. Also in terms of wind, Chile and Argentina have good wind resources, so if the tariffs are low you can get good wind revenues. I think the capacity factor could be over 30%”.

The current economic crisis and the knock-on effect on the price of oil have made renewable forms of energy less attrac-tive than in the recent past but Eugenio Chinchon told Alterna-

tive Latin Investor that the ideal time to make investments is now “If the crisis, say, ends next year, and we have recovery, things will be completely different. Many people who invest

now will get very good returns. Probably if you are trying to get into re-newables, particularly in Chile, in two years time you will be fine, but not as good as now. Now is the time to get in on the ground floor”. It would seem that many inves-tors are thinking in line with Señor Chinchon as over 20 wind farm proj-ects began in Chile last year alone. Ironically, the success Chile is having in attracting alternative energy investors could ultimately prove a nega-tive influence according

to Chinchon “If they build too many wind farms I think prices are going to drop and when you get some point that prices are so low, you cant recover your investment as no one will guarantee you a tariff for say 20 years. You have to live with the fact that every six months there will be a change in the tariff, and you expect it to be high but there is a lot of risk in terms of the tariff. At the moment there is a lot of problems with energy and that has been (like that) since 1995, and that is not going to change for the next 12 years. So if you build a wind farm now, you will have at least have 12 years of a very good price. If you have a good tariff, in less than 10 years you pay off your investment”.

Surprisingly Chile, with its lengthy Pacific coastline in not a good location for offshore wind projects as Eugene Chinchon explained to Alternative Latin Investor “Offshore is very dif-ficult, why? Because off the coast of Chile is the junction of the tectonic plate from the Pacific and the continent. After a couple of metres, the dip of the sea in that area is around 4000 metres. I think it is difficult on the Pacific side, and might be more possible on the Atlantic side. But in Chile I don’t think it’s a solution. Nor would any Latin American countries on the Pacific coast be interesting for investors”. Those who do choose to invest in Chilean wind power are typically looking at a 20 year life cycle for a return on their investment and Chinchon estimates that if the current tariffs don’t change too much you are looking at an 8% return or higher over 20 years. Though some 20 projects are currently under way in Chile there is only one wind farm that is presently operational. The Canela 18.15 MW wind farm, which is owned and operated by Endesa Eco (a subsidiary of the Enersis group), comprises of 11 wind generators and operates in the Coquimbo region in the village whose name it bears. Eugenio Chinchon explained to Alternative Latin Investor some typical costs of setting up a comparable though larger wind farm operation “The most

“Chile provides most of the copper in the world. As China has been booming

and asking for a lot of minerals, the price of copper has gone up. So they want to produce more but because there is

a shortage of energy, they couldn’t pro-duce. Also because of historical rea-

sons we don’t have natural resources to produce energy in the north, and the

only way to produce has been gas.

Renewable Energy

31

expensive part is the EPC contract. Depending on the size of the wind farm; Suppose a million watt wind farm using 25 turbines of two Megawatts, 80 meters high, more or less 65% of total cost, 80 million Euros. Turbines 65%, 10% civil works, 5% network to connect to a grid, 20% of the revenues go to maintenance”.

The mining sector in Chile is one of the main reasons for the upsurge in investment in harnessing Chile’s wind according to Chinchon “There are companies, mining companies who need electricity but don’t know about the energy business and are looking for companies or investors to put money into wind and doing a PPA agreement: Can you guarantee me energy for 20 years and make such type of deals. As these companies don’t know much about energy it is a good deal for investors who have done quite well. At the beginning there were only developers. Now there are investors who don’t have any idea,

but outsource or contract out to companies. The company gets the permits and builds the wind farm, and gets shares”. Some companies making moves in the sector are GDF Suez, who have been contracted to build two wind farms; Canada based Methanex have announced plans to develop a wind farm in the Magallenes region in Southern Chile in order to boost power production at its methanol plants hit by Argentina’s natural gas supply cuts; Australia’s Pacific Hydro is working with BHP Bil-liton to build wind farms in northern Chile. BHP wants to use wind energy to power some of its mining operations; British energy company Seawind is investing US$230 million in a 100MW wind farm in the Tocopilla region and finally Norwegian renewable energy developer SN Power are developing a proj-ect called the Totoral Wind Farm, which will have the capacity to produce 46 MW when it becomes operational at the end of this year.

Renewable Energy

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Wine

Colombia Heating

Up

For over twenty years increasing numbers of investors from outside the region have been looking for opportunities in Latin American real estate markets, but only the convergence of various positive factors in the last few years look to have firmly established this exciting and bountiful investment sector.

Colombia Heating

Up

33

WineUnderserved real estate markets with large populations and an increasingly wealthy middle class have been the carrots that have attracted the atten-tion of many a real estate investor to Latin America. However, interest often remained just that as investors and developers were discouraged by vola-tile inflation, precarious economies and indebted governments. Tedious bureau-cracy, regulatory barriers, corruption and the lack of reliable local partners were further reasons to enter the market at your own peril.

Whilst obstacles still remain, the property investment scenario in Latin America has changed dramatically during the last few years. The boom in commodity prices have given a huge boost to many of the regions economies. Brazil and Peru have joined Chile and Mexico in gaining investment-grade credit ratings. Improved credit policies have fuelled consumer spending and the purchase of homes, which in turn has seen a rise in demand for retail, manufacturing and in-dustrial space. The major office markets of the region Sao Paulo, Buenos Aires and Mexico City lack class A space so consequently have very high occupan-cies and consistent rent growth from increasing demand.

Though predicting the future has be-come increasingly difficult in the current worldwide economic environment, it is generally considered that Latin America will weather the crisis better than some other regions. Through experience many Latin American nations have learnt how to handle downturns in their economies much better. Some governments have built up currency reserves during the commodity boom years to help tide them over as international trade slows down and the regions economies are much less dependent upon credit than most countries around the world.

After consulting leading players in regional real estate sector Alternative Latin Investor found a general consen-sus that Brazil, Chile and Panama are best placed to face the worldwide crisis. These countries have historically been strong in attracting inward investment and now have internal demands that can

provide life to their respective real estate sectors. Mexico has a developing middle class that is creating demand in many sectors not least in real estate, but their economy is closely linked to their larger neighbour and likely to suffer more than other countries further south. Peru and Colombia have both been attracting an increasing international interest and we will look more closely at Colombia later in this article.

Uruguay and Argentina are expected to feel the effects of the downturn more than the earlier mentioned countries. Ar-gentina has been fairly successful at at-tracting foreign investment, but it suffers from a lack of confidence in the current administration. Uruguay has been attract-ing some interest in recent years through agricultural and tourism real estate inves-tors, though the country is often affected by the economic climate in neighbouring Argentina.

Venezuela, Ecuador and Bolivia are the least attractive Latin American countries for real estate investors at present. His-torically these countries have not attract-ed significant foreign real estate capital and there are concerns about political instability especially in Bolivia. Venezuela is suffering a drop in revenue as the price of oil remains low, though the previous boom has left its legacy in the form of inflation above 20%.

Nathan Weber, managing principal at Latin America Realty Partners has been involved in Latin American real estate for over five years and thinks the sector is showing very good conditions for the present and future “What I have seen in the five years I have been in the busi-ness is that there have been a significant amount of funds with dedicated capital to invest in commercial real estate in Latin America. I would say there are a lot of very intelligent people in this as-set class in this geographic region for a couple of reasons: - one, you have great demographics in almost every coun-try except say Venezuela and Bolivia. For the last seven years we have seen standards of living rise and newly formed middle classes. Middle classes drive an economy and subsequently drives real estate development”. And Webber says

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Wine

that the sector looks set to grow well into the future “I think its really attractive too because there is something like a 20 mil-lion unit shortfall of housing for domestic markets throughout Latin America, so residential communities targeting the middle class is something that is very attractive. Even in the current economic climate people need a place to live.... so that has been underserved and we see a lot of investment going into that asset class right now”. During an exclusive interview with Alternative Latin Investor, Nathan Webber told us that in his experi-ence the market draws from investors mainly located outside the region “sixty to ninety percent of investors in commercial real estate in Latin America were foreign-ers, the majority of that coming from the US, Canada and some European and

middle Eastern money. That money was deployed primarily through private equity funds and through traditional investment banking firms”

Whilst its generally agreed that the Latin American region is better placed than most regions to face the economic down-turn Nathan Webber says that the Real Estate sector has been affected “I look at our markets now and its really hard to do a deal whatever your doing. My four main markets are Colombia, Brazil (Brazil being by far the largest) and Mexico and we do some work in the US. What we have seen in our market is that many of the traditional players and investors have withdrawn completely or retrenched and are not investing and trying to figure out

a strategy. Who is investing right now are private equity funds that have dedicated capital to invest in Latin America. In terms of what those funds are seeking, you are looking at close end funds 5-7 years, capitalized. The average size is US$200 million all the way up to over a billion dol-lars. Those type of investors, 5-7 closed funds are seeking, after internal tax, rates of return of about 25%”. However whilst conditions may be tough for deal making at present, Webber told Alternative Latin Investor that Colombia should be top of the radar for those entering the market “I think Colombia is a hot spot right now, they have a large undersupply of com-mercial real estate, their security situation has vastly improved. It’s a great regula-tory business framework... very similar to the US as far as actual legal code”.

Colombia’s central bank chief Jose Dario Uribe said the country’s economy may expand 1 percent next year in the “worst case scenario” due to turmoil resulting from the worst credit crisis in 80 years. Growth may decelerate to 1 percent to 4 percent depending on how the global slowdown affects consumer confidence, capital flows and exports to the U.S., Venezuela and Ecuador, Uribe said at the bank’s quarterly presentation in Bogotá. The economy may slow to 3.5 percent in 2008 from 8 percent last year. “We can’t say exactly what will happen,” said Uribe, adding that inflation will ease in an “important way” in 2009. “Adding mon-etary policy has helped Colombia face the shocks we’re seeing from the global crisis”. The central bank Chief says the banks’ next decision would be to cut in-terest rates, without giving a time frame.

Surging consumer demand in Colombia since President Álvaro Uribe took office in 2002, pledging to make the nation safe from drug-funded violence, helped drive the US$172 billion economy last year to its fastest expansion in decades. According to the World Bank, Colombia was ranked second only to Chile as a place to do business in Latin America. At the end of 2008, the investment rate was 26.5% of GDP. The Banco de la Repub-lica (Colombian central bank) say that foreign direct investment grew 26% when compared to the same period in 2007,

going from US$ 6,772.5 million to US$ 8,537 million. Oil and mining industry in-vestment grew by 30% from US$ 4,520.4 million to US$ 5,884.2 million. Whereas investment in other areas increased by 18% going from US$ 2252.1 million in 2007 to US$2652.8 million in 2008. The number of tourists that visited Colom-bia has doubled since 2002, from 661 thousand travelers to 1.4 million in 2008. Between 2007 and 2008 the number of tourists grew by nearly 10%, fives times more than the overall world growth of 2%.

Amaury de Parcevaux is First vice-Pres-ident and Marketing Director of Falcon Real Estate Investment Company, which was founded in 1991 by former Chase Manhattan Bank real estate experts Howard Hallengren and Jack Miller. Falcon has a focus on non- US investors, those being institutional, private banks, family offices, hedge funds and wealthy individuals domiciled outside the US. Amaury says that Falcon have structured an umbrella fund based in Luxembourg that offers investors different options in Latin America “our fund gives people the choice of either investing in Argentina, Colombia, Brazil or the US in commercial real estate or an Agri fund, which will invest in Uruguay, Argentina and Brazil”. The investor base for the fund is heavily focused on European countries such as Germany, France, Spain and the UK, with over 80% institutional fund participation. However, whilst Europe has dominance in the fund at present, Amaury would like to widen its client base “We are also trying to target Colombian pension funds in Bogotá and also the Chilean family of-fices and venture funds. We also have a fairly large marketing effort in the Middle East were we have been since 1991. We have some very large clients there who have historically invested in the US with us and since we started working on those Latin American markets they have expressed an interest to go there as well”. While Amaury is looking to expand the geographical spread of his clients he feels that the umbrella structure of the Falcon Latin America fund is proving to be a good selling tool. “every inves-tor can access one of the five sub funds for $250,000 dollars and up, so there is

“our fund gives people the choice of either in-vesting in Argentina,

Colombia, Brazil or the US in commercial real estate or an Agri fund,

which will invest in Uru-guay, Argentina and

Brazil”.

Real Estate

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Wine

clearly an interest from the flexibility of this choice. A lot of those commercial funds, especially the ones investing in Mexico and Brazil are usually targeting institutional investors and have mini-mums anywhere from US$5 to US$20 million. So when you tell people, look, you have a shot at a diversified fund in one of those Latin American countries from US$250 thousand there is definitely an interest. Of course between an inter-est and a firm commitment there is a bit of a delay sometimes given the environ-ment today. It’s not entirely easy to raise money, but we’re hopeful we will be able to launch at least a couple of those sub funds within the next 3 to 4 months”.

When asked by Alternative Latin Inves-tor to elect a “hot spot” in Latin American real estate Amaury finds the opportunities offered by Colombia difficult to ignore, but explained that it can be difficult to alter the perceptions clients have of the historically troubled South American country “I think its very interesting to see the Europeans… lets say the French who have a very negative image of Colombia, and when you mention launching a fund in Colombia they look at you thinking…. you must be mad!…there is no way we are going to be investing in Colombia. With Betancourt already having been abducted you want us to go there”. How-ever, whilst some may need convincing that Colombia has changed drastically Amaury de Parcevaux does not “when you talk to people who really understand Latin America they really usually favour Colombia because its one notch below investment grade. It has had a fabulous comeback with the security today and also in terms of economic growth, they have not had negative growth for some-thing like 15 years except for 1999, so it’s a really well managed country”.

Real Estate

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The second corrective up move emerged from support at $51.00 and touched $65.00 where a Long Tail Down pattern halved the value reaching $38.00. The Low Pole pattern that developed after the final November 08 sell off to $27.00 project-ed an upside target set at $55.50, a level reached just recently. After trading sideways for almost 6 months prices penetrated the key resistance line at $41.00 on the end of March 09 clear-ing the way for additional upside movement. The uptrend de-veloped reaching quickly $51.50 where it bounced off the main resistance line before successfully penetrating it on the second attempt at $51.00. Prices are expected in the near future to pull back towards the intermediate support lines at $51.00 first and

Technical analysis

Latam Index Analysis

possibly to $49.50 before resuming the uptrend with medium term target at $65.50. Relative Strength vs the Msci Emerging Markets is positive in the long run implying that Msci Brazil will probably outperform. (Exhibit 1.1). Relative Strength vs the S&P 500 index has been positive in the long term since beginning of 2009 predicting also for the future a better performance than the Us index. (Exhibit 1.2). Stay long and increase at double top breakout at $58.50 with medium term target set at $65.50. On the downside lighten at double bottom breakout at $50.00 and close all longs at penetration of the main bullish support line now crossing at $45.00 with possible downside contraction to $41.00.

Msci Brazil (EWZ) recently raised above the main bearish resistance line at $51.00 switching officially to bullish mode. Since May 08 double top at $102.00 prices started declining sharply until the breakthrough of the main bullish support line at $86.50 on early June 08 changed the overall outlook to bearish. The down-trend, which was defined by a customary pattern of lower highs and lower lows,

found initial support at $68.00 where a corrective up move evolved pulling back prices to $75.00 before resuming the contraction.

37

Technical analysis

Exhibit 1.1 - Msci Brazil compared to Msci Emerging Markets – Brazil will likely outperform emerging markets in the long run

iShares S&P Latin America 40 (ILF) – The Latin America index closed the week at $36.03 recovering from recent retrace-ment to $35.25 and maintaining its bullish bias although we might see in the next few weeks a pull back towards the main bullish support line in the area of $31.25 before the next up move will develop. The index reversed its trend since Febru-ary 2009 lows at $21.50 when prices developed a piercing up thrust which were breaking through the main bearish resistance line at $25.50 changed the trend from bearish to bullish. The uptrend corrective downturns have been nicely contained by the intermediate trendline at $25.50 at the end of March 09 and $27.75 in April 09. The key movement that triggered the recent sharp up move was the multiple top break out at $30.25 which also projected also an upside target set at $44.75. The oscil-

lators are overbought predicting a likely slowing down in the uptrend. The Relative Strength analysis is showing the index has turned positive in the long run vs the S&P 500 (Exhibit 2.1) implying an outperformance of South American shares for the future. While the RS vs emerging markets (Exhibit 2.2) is still struggling to find the way to reverse the trend a bottom seems to be in development. We have to wait few more weeks to see if this is the case. Stay long increasing at double top breakout at $37.50 with targets set at $41.50 short term and at $44.75 in the medium term. On the downside lighten progressively at double bottom breakout at $34.50 and $33.25. Close all longs at penetration of the main bullish support line now crossing at $29.50 with possible downside contraction to $27.75.

Exhibit 1.2 - Msci Brazil compared to S&P 500 Index – Relative Strength turned positive for the long term.

38

Technical analysis

Exhibit 2.1 – S&P Latin America 40 compared to S&P 500 – The trend turned positive in the long run.

39

Technical analysis

Exhibit 2.2 – S&P Latin America 40 compared to Msci Emerging Markets – A bottom seems to be developing.

Profile █

Fabio Verdelli (CMT) is the equity technical analyst at MV Portfolio Advisors. He has analyzed commodities and financial markets using technical analysis since 1998 and implemented technical analysis to develop trade ideas and assess risk. He is an expert on Point & Figure charting method and is currently publishing analysis on “Trend-online” financial website and Ya-hoo Finance Italy.Verdelli is a member of the Market Technician Association (MTA) and a member of the nominating committee within the MTA. MV Portfolio Advisors offers capital investment and risk management consulting. The firm provides equity research reports based on technical analysis featuring invest-

ment opportunities arising in the marketplace to help portfolio managers making timely trades.

Company █

MV Portfolio Advisors offers capital invest-ment and risk management consulting. The firm provides equity research reports based on technical analysis featuring investment opportunities aris-ing in the marketplace to help portfolio managers making timely trades.

40

Philanthropy

Philanthropic Moves

Ultra-high Net Worth Individual’s

The current relative stability, the growing importance of the region to the global economy, and the wealth of opportunities for impact make LatAm an intriguing and at-

tractive region for philanthropic investments. Once virtually non-existent, LatAm’s philan-thropic infrastructure is emerging with many possibilities for growth. In Mexico, 19 commu-nity foundations or similar organizations have been founded in recent years (Hispanics in Philanthropy). In Brazil, the most advanced country in LatAm in terms of socially responsible corporate organizations, the number of foundations grew by 157% between 1996 and 2002. The num-ber of institutions is set to steadily expand throughout LatAm as the social focus becomes increasingly important for the large business sector (Fernando Rossetti, secretary of Grupo de Institutos, Fundaciones y Empresas Brasil - GIFE).

Profile of the UHNWI philanthropist in LA █

There are an estimated 300,000 HNwIs in Latin America with a total financial asset wealth of USD6.2 billion as of 2007 - a staggering 20.4% leap from a total of USD4.2 billion in 2005. The surge in sudden wealth is mainly linked to higher global commodity and oil prices. (Capgemini-Merrill Lynch 2008 World Wealth Report)

However, with philanthropic giving by wealthy Latin Americans well below their counterparts in other regions of the world -

just 3% of financial assets donated compared to 12% by Asian HNWIs, 8% by Middle Eastern HNWIs; 8% by US HNWIs; and 5% European HNWIs. (Capgemini-Merrill Lynch 2007 World Wealth Report)

Interestingly enough, LatAm was also the region with the highest global concentration of Ultra-HNWIs last year. Around 2.5% (9,600) of HNWIs in the region were ultra-rich in 2007, compared to 2% in Africa and 1.1% in the Middle East. (C-ML WW Report 2007) Several of these consist of “first generation money clients” with larger portfolios than in established markets - a new segment for which competence is highly important. ****

The countries that generated the most HNWI wealth in the region last year were Brazil, Venezuela and Chile. (Ileana Van Der Linde for Capgemini in an interview with Andres Oppen-heimer, El Nuevo Herald 18/08/08)

Although these figures point to an alarming socio-economic trend of severe economic disparity in LatAm, local analysts have cast doubt upon their accuracy. The rich in LatAm are known to make donations confidentially, in a bid to avoid exces-sive publicity that may expose themselves or their loved ones to kidnapping and/or extorsion schemes that are common in LatAm, they have pointed out. (Oppenheimer, El Nuevo Herald 18/08/08)

Education, Public Health and Food Distribution are the areas that receive the most backing by both philanthropic individuals

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Philanthropic Moves

and institutions in LatAm. (Anne Veneman Unicef executive director, La Nacion, 19/04/08)

The UHNWI Philanthropist in General █

UHNWIs across the world account for 1% of the total HNWI population (about 95,000 people total) and about a third of its financial wealth, and are generally better informed, more sophisticated and aggressive than other HNWI investors when it comes to managing their assets. A segment made up of “thought leaders,” their behaviors and attitudes about wealth management set trends for HNWIs and financial institutions everywhere. (C-ML WW Report 2006)

In regards to philanthropic giving, they generally donate almost twice as much of their wealth to charitable causes than HNWIs and take up a very active role in managing and monitoring for optimal social results. For an UHNWI, they approach their phil-anthropic investments in much the same way as their traditional investments.

In recent years and in regards to LatAm specifically, UHNWI have been aggressively directing a higher percentage of its as-sets to a greater number of emerging markets, including LatAm, away from North America. This trend among UHNWIs indicates HNWIs as a whole are moving funds out of mature economies,

such as the United States, and into attractive growth economies in other parts of the world. (C-ML WW Report 2006)

Structural Challenges in Giving █

What is holding LatAm back in terms of UHNWI-based Philan-thropic Giving is the lack of a well-developed culture of chari-table giving, say the experts.

Wojtek Sokolowski, a researcher from the Johns Hopkins Uni-versity Center for Civil Society Studies in charge of compiling a comparative list of donations in 36 countries, said perceived social status is what is different between LatAm and first-world countries with higher philanthropic giving percentages.

“In the US, the more a millionaire donates, the greater social status they receive. In a lot of Latin American countries, dona-tions are not a symbol of social status,” he said.

As a result, institutionalised charitable giving in LatAm is re-stricted only to those who are bold, daring and/or of the wealthi-est UHNWI-and-above bracket.

Billionaire Mexican businessman Carlos Slim, for example, has drawn unprecedented media attention to the role of philan-thropy with his massive contributions in the last two years but

42

it is free-thinking UHNWIs like Mexico’s leading social entre-preneur and cosmetics business magnate Jose Ignacio Avalos Hernandez, who has founded several well-developed charitable business-managed institutions in the last 25 years, that LatAm needs more of so that the rich may follow, note observers.

A main obstacle to the proper development of charitable family foundations and the like has been a general historical financial instability in the region that has both prevented the UHNWI seg-ment from making philanthropic plans in the long-run and from recognising that such institutions can contribute to success for an UHNWI’s other business ventures. (Mario Kreutzberger, president of Chile’s Teleton Foundation)

Observers also cite blatantly unsupportive tax and inheri-tance laws compared to the US and Europe and the fact that the families of rich Latin Americans are typically more numerous - a fact that often persuades fortune holders to donate less to charity. (Oppenheimer) Estate laws in LatAm reflect this reality in effectively restricting the ability of the wealthy to allocate money other than to heirs. Still, tax laws in general are slowly changing throughout the region to provide incentives for philanthropy. (Susan Raymond, Ph.D., a Senior Managing Director of Changing Our World, Inc. a leading philanthropic consulting firm - “Philanthropy in Latin America”)

“As an incentive, we are exempt from capital gains taxes and from social security matching for the 2,600 employees of the foundation,” said Jefferson Romon, administrative and financial manager for Brazil’s Fundacion Bradesco, who added that there are bills in Congress to increase them.

According to Eduardo Pannunzio, a legal advisor to Brazil’s Grupo de Institutos, Fundaciones y Empresas (GIFE), charita-ble entities can deduct 100% of their donations to cultural proj-ects, up to 4% of taxes on earnings owed to the government. The same incentives, however, are not available for donations to educational or environmental projects.

“In Argentina, charitable entities can only deduct up to 5% of earnings in just four areas, one of which is to back political foundations,” commented Enrique Valiente No-ailles, president of Grupo de Fundaciones de la Argentina (GDF). “We estimate that the annual volume of dona-tions in the country is USD10 million. It’s a drop in the bucket, but if there were more incentives it would increase

significantly.”(“The new philanthropy: Latin America Inc. turns to foundations as a strategy for serving social ends” Latin Trade. January 2007)

Other challenges include the region’s governmental penchant for bureaucracy and the lack of regulation for family offices that would assure potential philanthropic investors the long-term security of their investments. (Mariano Sardás, president of FDI - Financial Design International, in INFOBAE article “Cada vez hay más “family offices” 07/04/08)

The increase in philanthropic institutions in Brazil, particularly, has inspired the government to step up controls of the sector. Organisations there are newly required to disclose their sources of financing, list executives, and provide a breakdown of their plans and locations of operations as well as a host of support-ing documentation on pain of closure or, if foreign, of expulsion from Brazil.

While campaigners criticise the move as one that discourages and burdens the mushrooming movement with additional bu-reaucracy, the fact that the government is pushing for legitimacy and financial accountability has been applauded by a number of stakeholders. (“Brazil increases scrutiny of NGOs” Alliance Magazine. 15/08/08)

“In the US, the more a millionaire do-nates, the greater social status they

receive. In a lot of Latin American countries, donations are not a sym-

bol of social status,” he said.

Philanthropy

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Wine

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Regulation

razils Bimproving Corporate Governance

A significant reform took place in Brazil in 2001, when two 1976 corporate laws no. 6404 and 6385 were updated leading to amongst other things an improvement in shareholders rights and their enforce-ment and importantly a granting of independence to the CVM (the Securities and Exchange Commission of Brazil). Jose Luis Osorio went on to explain that at the same time the BOVESPA (the Sao Paulo Stock Exchange) created three new listing levels for issuing companies,

each with increasing better corporate governance requirements. These three levels were voluntary and contained the following elements; Level I, required and improvement in quarterly reports and the disclosure of an annual calendar of corporate events; Level II, looked for the elements of Level I as well as Tag along rights (80%) and voting rights granted to preferred shares in transactions between related parties; The highest and final level was called “Novo Mercado”, which

incorporated the elements of levels I & II but in addition had Tag along rights (100%) and one share one vote. Mr. Osorio, a former President of the CVM concluded his brief historical summary by mentioning that the CVM and the Central Bank of Brazil oversee the Brazilian fund industry.

Mr. Osorio then highlighted some of the more recent developments aimed at providing greater investor protection and

From the mid 1990’s until 2000 the Brazilian equity market was characterized by poor corporate governance, weak enforcement, little minority investor protection, shallow liquidity and low valuations. This challenging situation provoked de-listings and forced a migration of companies seeking the greater protection that the NYSE could offer. Fast-forward to the period between 2004 and 2007 and the scenario had changed completely,

with a record number of IPO’s coming to the market raising a total of US$45 billion from foreign and domestic investors. So how can such a turnaround be explained? Alternative Latin Investor was fortunate to attend the recent alternative investment summit in Sao Paulo, Brazil and Jose Luis Osorio from Jardim Botanico Partners shed some light on how investor protection legisla-tion has evolved in the recent past.

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Regulation

razils improving Corporate Governance

transparency in Brazil. Some of the more significant actions have included; bet-ter enforcement against Insider Trading through a 2005 agreement with the Bra-zilian Public Prosecutors office; a conver-gence of Brazilian GAAP accounting to IFRS; the introduction of the possibility of on-line voting and a CVM guideline no.35 on mergers between companies with the same controlling shareholder. Jose Luis Osorio then spoke of how the financial crisis was shaping debate for new rules and regulations currently being consid-ered. In November of last year, BOVE-SPA created a committee, headed by a

former head of CVM, to conduct a review of the Novo Mercado rules mentioned earlier. The consultation process with market participants involves the following aspects that Mr. Osorio highlighted; 1. Poison Pills; 2. Board member participa-tion and 3. Corporate restructurings – Tag Along Rights.

In concluding his presentation Jose Luis Osorio posed the question “how has the BOVESPA’s Novo Mercado performed?” He said that if measured in terms of the number of new companies that accessed the equity market and the volume of

money raised that the success of the Novo Mercado is unquestionable. Osorio also thought that it is indisputable that Novo Mercado companies can now boast better governance standards than those in the traditional market. Finally and perhaps most importantly the question was asked as to if better corporate gov-ernance had led to better performance? Osorio compared the performance of the IBOVESPA with the IGC (special gover-nance stock index) since 2001, and he illustrated that the IGC has consistently performed better than the Ibovespa.

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Art

Latin American Art Growing in

Popularity

A new generation of Latin American artists are ensuring that works from the region are attracting international buyers in increas-ing numbers. Up until thirty years

ago the majority of works coming out of the region were purchased by wealthy Latin Ameri-can families who would often build their collec-tions up over many generations. Whilst South American buyers and those of Latino origin still make up the lion share of buyers from this di-verse and exciting region, Virgilio Garza, Head of Latin American Art at Christies says the cat-egory is going increasingly international “The demographics of the clients has changed, little by little there were a lot of American collectors buying Latin American art seriously. Now in the past four years there are other players who have changed the dynamic.

There are Europeans, Middle Eastern, some Asian buyers look-ing for specific things and even Russians have been regular buyers”. Auction house Bonhams have become aware of the

increasing interest in the regions’ art and told Alternative Latin Investor they are working towards a fully committed Latin Amer-ican catalogue in the future. Cindy Cronk, a street art specialist for Bonhams, based in California, sees a long term potential for South American art “I think its been on the radar for a while. Its slowly growing which is actually more stable than say with contemporary Chinese artists, now their works aren’t selling. I think it’s encouraging to see it slowly building up. I think it gives it more stability”.

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Art

´Latin American Art´ is a contentious and very broad term that incorporates pre-Colonial, Colonial, an Independence period, Muralism from the last century and the modern era that has seen the emergence of exciting new talents. Though the given label has been shunned by some modern artists keen to em-phasize movements within their own countries, Virgilio Garza feels the creation of the category was fundamental to its pres-ent day popularity “As a term Latin American art is very, very broad because it doesn’t really limit a time span. Latin America is so complex and there are a lot of regions so you cant really speak of one Latin American art. Ever since the beginning, the sale (at Christies) started including Spanish colonial works from the 18th century up to the present. So, in one sale you really covered centuries of art from many different regions that historically never really communicated with each other too much. Even though there was a Latin American identity there was a lot of artists, developed in the early 20th century, who were looking at Europe rather than Brazil. The catalogue and the category were very important for that reason because it really cre-ated awareness. For example Mexican collectors actually learnt about the art of other countries in Latin America just by receiving the catalogue, looking at it and coming”.

Up until the 1970’s the majority of Latin American art was sold here and there, often mixed into impressionist, modern or fine art sales. In 1981 Christies made a landmark decision and held their first auction in New York dedicated solely to Latin American art. Virgilio Garza from Christies recalls there were incredible bargains to be had at the time “I remem-ber all these Mexican families created very important collections by buying at auction back then. At the time a lot of great, great things were available more easily than now. For example if you look at a sale in 1982 you would find that there are masterpieces like Frida Kahlo and Diego Rivera and now you really have to go out of your way to get one of those”. Mexican painter Frida Kahlo is probably the best-known Latin American artist throughout the world today. She painted self- portraits and depictions of Mexican culture combining Realism, Symbolism and Surrealism. Whilst Kahlo died in 1954 it wasn’t until the 1980’s that her work began to the sort of atten-tion that today sees her works sell for amongst the highest prices ever attract-

ed by a female artist. Virgilio Garza says the “Kahlo effect” was very significant “In the 80’s Latin American works were priced at a million dollars and that was a big thing and then in the 90’s Frida Kahlo came along and there were a couple of works in the field that sold and she surpassed the two million dollar mark which was an important landmark. Then not long ago, Frida Kahlo surpassed the US$5 million dollar mark it may not sound that impressive if you see other figures from the contemporary or impressionist world, but it’s important”.

Christies currently hold two Latin American auctions each year, one in May and one in November. In 2003 the May sale real-

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Art

ized US$5,702,796 (see table), whereas, to give an indication of how interest has grown, by May last year their auction set a world record for the field by auctioning works to a value of over US$33 million. This auction also contained a world record for a single piece by a Latin American artist as Rufino Tamayo’s, Tro-vador sold for US$7,209,000, eclipsing the previous record of US$5,616,00 paid for Frida Kahlo’s Roots in May 2006. Trova-dor led a series of important new records for Mexican modern art including Leonora Carrington, Pedro Cornel, Juan Soriano, and Emilio Baz Viaud. In addition to the Mexican success, other notable Latin American records were set for Jesús Rafael Soto, Gonzalo Fonseca, and Mario Carreño.

As the Christies sales table shows, the art industry is not immune from the current global crisis. At their last auction held in November last year Christies only realized just under half the amount of the previous record sale but Garza is not concerned for the long-term prospects “We are very optimistic because our field is not one that has huge ups and downs. People are still buy-ing and we think that we may be going back to 2006 levels more or less when the market was good but it wasn’t as high as it was at the end of 2008 beginning 2009. We have a very exciting sale coming up in May so we hope people are going to re-spond”. And whilst prices may be down at present Garza feels it offers opportunities not available in other sectors of art “It’s a very young category. I always say it and ill keep saying it, we are very good value and there is great quality. If you have a million dollars you can build a serious collection as opposed to other categories where the art is so expensive your money may not go that far”.

If a Tamayo, a Rivera or a Kahlo is beyond your reach it may be worthwhile investigating the latest strand of Latin America art attracting much attention according to Virgilio Garza “Something that has been happening and its an incredible phenomenon is that a lot of artists from the 60’s and 70’s are being rediscovered big time. What is attracting interest is lot of geometric abstraction, Pop Art artists like (Venezuelan) Jesus Rafael Soto, who had had a very important career in the 60’s and 70’s then sort of fell out of fashion. There are different schools and movements but I would say geometric abstraction from the 60’s & 70’s is very hot now. Those are artists that were forgotten and the 80’s weren’t very good to them. In the 90’s little by little people were looking at them again. Now there is a real market for them”. During his exclu-sive interview with Alternative Latin Investor Virgilio Garza, Head of Latin American Art at Christies gave us some more

of his hot tips for investing in the market at the moment “I would say a very successful artist who sells both in Latin and the contemporary sales is Vik Muniz from Brazil. There is a another Brazilian who we have sold very well called Adriana Varejao as well as a Mexican artist Gabriel Orozco who sells more with the contemporary sales”.

Whilst works by artists such as Kahlo have undoubtedly been fundamental in giving Latin American art the profile it now enjoys, there is a new, refreshing generation who are taking the regions’ art in new directions. Cindy Cronk from Bonhams spe-cializes in street art and finds inspiration in what is happening in

Sao Paolo, Brazil “My personal interest is in street artists coming out of Brazil. In Sao Paolo there is a gallery called Choque Cultural and they offer some really interesting artists. I like Calma and Zezão a lot but there is some amazing art-ists just working on the streets there. Graffiti and mural art they are actually bringing in. Sometimes they’ll actually do it on gallery walls. They do a lot of screen prints, which are actually quite affordable to anyone starting out. We have urban sales, but I think eventually if its strong enough we could build an entire Latin American sale from the early works through to what is going on now”.

As well as contemporary artists emerging from the Brazilian street scene there is an important generation of young artists in Mexico City doing very well internationally and Puerto Rico can boast a new scene that is gaining international recognition. Besides her passion for artists from Brazil, Cindy Cronk feels that other countries provide interesting options for the collector and that interest in her home state of California has never been greater. “I think every Latin American country has some artists such as Fernando Botero is from Colombia. The museum of Latin American Art here in Long Beach that’s another example of the strength of Latin American Art, especially here in Califor-nia. That they have a museum dedicated to it is partly due to the collectors. We have some serious collectors here in South-ern California and the museums have benefited from that as they have donated their collections to these museums. MOLA is getting ready to have an exhibit on Oswaldo Guayasamin from Ecuador, its very intense art”.

As Latin American art enjoys a more international profile attracting interest from investors from all over the world, it should be remembered that until recently it was wealthy families from countries such as Mexico, Brazil and Argentina

“The demographics of the cli-ents has changed, little by little

there were a lot of American collectors buying Latin Ameri-

can art seriously. Now in the past four years there are other players who have changed the

dynamic. There are Europeans, Middle Eastern, some Asian

buyers looking for specific things and even Russians have

been regular buyers”

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Art

that patronized South American artists. Cindy Cronk told Alternative Latin Investor that the majority of their clients still come from the U.S.A and Mexico but that they now have to compete for that special work with a world market “all the great Mexican artists, like Diego Rivera, typically are going to collectors in Florida, California, a little bit in the south west like Arizona, Texas and in Mexico. We have some serious collectors in Mexico but people are bidding on this from all over the world. Since our company is based in London we have a huge client base and its truly international. During our sales we will have two tables filled with phone bidders…that’s people bidding from all over the world!” And if you do plan on bidding and are new to investing in art, Cindy has some sound advice “As with the western world the estab-lished artists are still selling and the prices are still really strong and I think that Art will always be a good investment. The number one rule that I tell people is buy what you like, but you definitely want to do your research. I think you are going to get a quicker return if you are investing in the more established artists. For me looking towards the urban artists I think there will be some who will maintain their prices and actually really end up having successful careers. It’s a good time to buy art, especially right now. I think the prices are back to reality a bit”.

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Wine

Wine Investmentfrom a Latin American Perspective

Serious investors might be interested in subscribing to www.liv-ex.com, the London International Vintners Exchange, which tracks the value of the top internationally traded wines, and through which a large amount vintage wine is traded. A disproportion-ate amount is vintage Bordeaux – of the top 10 traded wines on Liv-ex in 2008, nine were Bordeaux (of which the top 5 were the ever present Bordeaux West Bank 1st Growths, Latour, Lafite-Rothschild, Latour, Margaux, and Haut-Brion, followed by Petrus, Cheval Blanc, La Mision Haut-Brion, and Carruades de Lafite. In tenth place came the sole Burgundy, the super-exclusive and mas-sively limited production Domaine de la Romanee Conti.

The most widely traded new world wines include the Penfold’s Grange, from Australia and the Opus 1 inspired by the late Robert Mondavi in Napa, California. Amongst the Latin Ameri-can wineries, pride of place goes to Catena, Achával Ferrer, and Viña Cobos from Argentina (with a nod to Weinert for their excellent although not widely traded 1977 Malbec), and Lapos-tolle and Almaviva from Concha y Toro in Chile. My personal favourites are the Vina Cobos wines made by Paul Hobbs (of Hobbs winery fame in California) which will evolve brilliantly and at some stage may achieve 100 point-scores, with correspond-ing increase in resale value, likewise the top single-vineyard Achávals and Catenas, which are already competing with top-end Bordeaux in terms of quality, though this is yet to reflect

In today’s market, despite these times of crisis, there is a lot of money looking for a safe home. Given low global interest rates, depressed stock markets, and collapsing property values, fine wine is undoubtedly an interesting investment, and as the top “New World” (Chile, Argentina, Australia, South Africa, New Zealand) wines continue to improve and com-pete with the previously dominant Bordeaux and Burgundy wines, there are an ever-increas-

ing range of options. As with any investment, one needs to be aware of the risks and possible traps and take qualified counsel. So here are some basic guidelines to wine investing, some rules that anyone thinking of investing in fine wine should pay close attention to:

itself as demand in the international wine market.

Historic investment returns from Argentine and Chilean vintages are almost impossible to present, as Latin American wineries have only in the past 15 years started to seriously compete with their European competitors, following wave upon wave of investment (in technology and foreign and local expertise) from the mid 1990’s to date. In the case of Bordeaux there are re-cords going back centuries, with consistent proof of the special ageing properties and development of these wines – which to a large degree explains the active market for these wines that has developed over time. Based on a combination of vertical tastings going back decades, one can accurately chart the likely future evolution of the top Bordeaux and Burgundies.

With these new wines coming from the New World their future evolution, although likely to be similar, is also partly a matter of “wait and see”, and reflected as such in the illiquid-ity of these wines in the resale market relative to Bordeaux. On the other hand, opportunities galore exist to pick up some of the world’s top wines at knock-down prices – though to invest more than one is willing to lose doesn’t make sense, this is likely to represent a paradigm-shift in the wine world of the future, as well as a great buying (and drinking) opportu-nity for true wine lovers.

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Wine

Don’t invest more than you can afford to lose – prices do • go down as well as up, so wine should represent only a small part of a balanced investment portfolio. “Irrational Exuberance” is not confined to stock, currency, bond, and property markets. For instance, following the exceptional Bordeaux vintage of 2005, there followed an ordinary 2006, and a downright mediocre 2007. However, car-ried away with the ´05´s success and rocketing yields, plenty of amateur investors got their fingers burnt paying over-the-odds for both the ´05´s and the mediocre later vintages.

Shop around for the best prices. Sounds obvious, but • plenty of investors fail to heed this advice and lose out as a result.

If you are buying through a specialist investment com-• pany, take a good look at their historical returns, and be clear about commissions (fixed or percentage) charged. Also be aware that the best prices are generally offered “en primeur”, basically the wine is sold in advance about 2 years before being bottled – however, a wine that scores top points en primeur, may flatter only to deceive as it later evolves in barrel and bottle, so there is a certain risk attached.

Store your wines in the appropriate conditions, and know • the wine’s “service history” before purchasing. Even the top Bordeaux from the best vintages (such as 1982) will turn to vinegar if inappropriately stored. • If you’re buying exclusively for a capital return, it’s recom-mendable to have a significant part of one’s wine portfolio in Bordeaux from the top years.

Buy wine from the best years/vintages – this is of especial • importance with Bordeaux and Burgundy, which varies massively in quality from year to year – mainly due to the vagaries of climate in the top “Old World” winemaking regions. In the New World (Australia, Chile, Argentina etc) there is generally less qualitative difference between vin-tages, although this is not to say that all are the same and the wines will evolve equally year-to-year – there is still a risk of pre-harvest rain and, principally, hail, that can wipe out an entire producer’s vintage as well as human factors.

Wine doesn’t generally attract capital gains tax as it is • considered a perishable good – though it is worth check-ing with your relevant local authorities.

Nigel Tollerman is a professional sommelier and wine consultant based in Buenos Aires, Argentina. As well as running 0800-vino.com, he works on tasting panels for local publications and actively consults to a num-ber of wineries and foreign investors. For more information see www.0800-vino.com or write to [email protected]

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2006 Cobos Malbec Marchiori Vineyard – the best world-beating Malbec that Argentina has to offer from Paul Hobbs’s Viña Cobos winery in Mendoza – cellar now and drink from 2020 through to 2040 and beyond.

Nicolas Catena Zapata 2005 – Catena’s flagship Cabernet Sauvignon-Malbec blend. This wine needs at least 6 or 7 wines to reach maturity, then will be at its peak until 2030.

Achával Ferrer Finca Altamira 2007 – top single vineyard Malbec from one of Argentina’s benchmark export-focused wineries. In a few years will have genuine collector’s value, and will drink through 2030.

Nigels picks █

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Alternative Latin Investor: Issue 1