Asset Class: Emerging Markets Equities

Country visits: Chile, Peru and Mexico

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Chile

Chile is a country that punches above its weight as a nation. After lagging behind its Latin American peers in terms of GDP per capita in the 1980s, today Chile is the wealthiest nation on the continent and the leader in the region from a human capital perspective.1 The political landscape has remained stable, with most recent governments being led by left or right-leaning centrist parties, providing a stable economic environment that has led to Chilean businesses doing well locally and using their excess cash flows to invest, whether regionally or internationally. From this aspect, we cannot emphasize enough the competitive advantage of having stability backed by supportive liberal policies; these advantages are often overlooked in a large number of emerging markets countries. While a great story, Chile also has its challenges: high youth unemployment, limited diversification of the economy away from commodities (copper in particular), high economic inequality levels, increasing wild fires (raging while we were there), melting glaciers and water scarcity. We currently do not have any investments in Chile, but after our meetings we were encouraged by and are following up on two potential investments.

Peru

Peru’s development has been volatile. Despite returning to democracy in the 1980s, the economic and political landscape has been fighting various degrees of authoritarian leaders, economic crises, hyperinflation, and corruption scandals, causing restrained investment flow locally and from international investors. The situation is such that the past five presidents are either under investigation for corruption or served time because of it. Even with all of these struggles, Peru has managed to reduce its poverty rate down from 55% in 2001 to 21.7% in 2017, lifting millions out of poverty. The improvement has been curtailed of late as the country has faced political turmoil with the resignation of the former president over conflict of interest allegations. Peru, like Chile, is also very exposed to the mining cycle from which they have benefited due to the construction boom in greater China region over the past decade: 72% of its exports are commodities, with copper making up 30%, the rest being gold, zinc, oil and gas, agriculture and fishery products.

Credicorp

In Peru, we met with one of our holding companies, Credicorp, which is partly owned by the Romero family, whom we respect as partners. Unlike our other bank holdings that preside over existing strong operations and financial ratios, Credicorp stands out because it has been able to improve itself over time to become a leading bank in Peru. We have seen return on assets (ROA) and return on equity (ROE) increase from 1.4% and 13% in 2013 to 2.3% and 18% respectively, with the efficiency ratio improving from 47% to 43%.2 Another positive aspect of this bank is its subsidiary in microfinance called Mibanco, which offers banking products tailored to micro entrepreneurs, and promotes financial inclusion in underdeveloped segments with the sales representatives also acting as advisors. We are happy with the direction of the travel and the impact element of this holding.

Mexico

We went to Mexico on a research trip to visit a number of companies and get a better understanding of the evolution of ESG management practices. We found that companies have started to respond strongly to growing public awareness around environmental and social issues — water availability, air pollution, plastics and inequality in particular. While the policy context to address these issues remains relatively weak, all of the companies we met expressed their belief that the long-term success of their business depends on addressing material environmental and social risks and opportunities head on. Governance is also an area companies continue to focus on, and the notion that good governance practices are critical to success is widely held. However, as is the case in a lot of markets, governance is largely seen as a compliance exercise — i.e., follow the letter of the law rather than its spirit.

During the trip, we met with our holdings Wal-mart de Mexico (Walmex) and Bolsa Mexicana de Valores, the Mexican stock exchange.

Walmex

We met with senior executives, including the CEO, as well as sustainability officers. We came back with the conclusion that the management understands that transformation is vital to the long-term health of the business given changing technology, emerging risks, Millennials and Generation Z, and new competitors. Initiatives to improve digitalization, data analysis, store floor productivity, employee engagement and omni-channel sales have started or will soon start.

We had the chance to discuss employee relations at the company. The actions taken by management to enhance working conditions and employee relations over the past few years seem to have been effective in improving the working environment and ultimately employee satisfaction. However, recent events, including a strike threat over wages called by one of the main unions and the looming and potentially radical labor reform promised by the new president of Mexico, indicate that labor-related risks to the business are very much latent. We recognize this latency yet deem such risks to be manageable as well as effectively managed. The company’s continuously evolving approach to engaging with staff and providing attractive and fair working conditions is laudable and should contribute to better retention rates and, importantly, enhanced productivity. We will be keeping a close eye.

Bolsa Mexicana

We met the company and discussed its approach to driving stronger ESG practices among listed companies, while encouraging it to improve its own ESG-related transparency and disclosure. On the former, we welcomed the active role that the exchange has taken, including: membership on the Committee of Corporate Best Practices, the multi-stakeholder body responsible for the publication of the Mexican Code of Corporate Best Practices; sponsoring a sustainability working group of 30 listed companies; and joining the Sustainable Stock Exchanges initiative. As for the latter, we strongly encouraged the company to disclose with enough information on the resolutions being submitted for shareholder approval at AGMs or EGMs.

 
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1http://blog.investchile.gob.cl/world-bank-chile-has-the-best-human-capital-in-latin-america – The World Bank defines human capital as the sum of the knowledge, skills and health that people accumulate over the course of their lives.
2The efficiency ratio is calculated by dividing the bank’s non-interest expenses by revenues; a lower ratio signals better operating efficiency.

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