Tales from the Road: Latin America

18 June 2019

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Industry dynamics can differ greatly from region to region in Latin America ... our research can take us off the beaten track in search of new opportunities.

Latin America has a lot to offer investors. Emerging market portfolio managers Paul Desoisa and Colin Dishington travelled across Brazil and Peru to assess some of the potentially overlooked investment stories the region has to offer.

Casting the Net Wider

Industry dynamics can differ greatly from region to region in Latin America, with sectors often dominated at a local, not a national level. With this in mind, our research can often take us off the beaten track in search of new opportunities.

For example, we were told relatively few investors make the effort to visit Belo Horizonte – most likely because, compared with São Paulo and Rio, there are fewer investable companies based in the city. However, leaving it off the itinerary also means missing the chance to visit a company like MRV Engenharia (held in the strategy) which is headquartered there.

As Brazil’s largest housebuilder, MRV has an important role to play in the wider Brazilian economy. The sheer scale of the country’s housing shortage was clear when observing the favelas on the hillsides while travelling between locations in Brazil. The country's housing gap stands at around 8 million units and is growing by 500,000 homes per year.*

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MRV’s solution is to develop a standardised building process that allows it to speed up production, using aluminium moulds which are filled with concrete, meaning structures can be put up in days not weeks. With assistance from this improved productivity, the net gain to Brazilian society is around 50,000 homes per year.

There has also been significant investment in technology. MRV estimates that technology on its construction sites and sales office is saving around 4,000 hours a month in workers’ time and is reducing the time taken to build new housing units. Following changes in consumer behaviour, 60-65% of sales now originate online and MRV’s IT hub is working on projects including chatbots and artificial intelligence to engage with customers.* The company even employs virtual reality headset technology, not only to show customers their future homes, but also on the construction site, allowing engineers to improve the speed and accuracy of the construction process.

Chasing the Billion-Dollar Smile

Another trend which is seemingly unique to Brazil is the importance of dental hygiene. Consumption of toothpaste is approximate to developed-market standards and the number of dentists per head is higher than anywhere else in the world.

There are, of course, other countries with high levels of dental treatment, but where Brazil differs is that most people pay out of pocket for their treatment (rather than through a treatment plan or insurance). Dental care services company OdontoPrev (held in the strategy) is changing this by offering an insurance package cheaper than the average out-of-pocket yearly payment. With an oversupply of dentists in Brazil, OdontoPrev has been able to spread its treatment among large numbers of dentists that are under-utilised, rather than rely on a smaller few who then charge higher fees.

We saw first-hand the reason OdontoPrev is able to offer such good rates on a visit to its São Paulo premises, as we observed a room full of qualified dentists in lab coats approving and reviewing treatments following electronic submissions from the clinics. Every single insurance claim is qualified manually, meaning audits of around 7,000 procedures a year. With this level of oversight on dental work there is no room for price gouging in the system and they can avoid unnecessary and expensive procedures.*

The next stage for OdontoPrev is the use of artificial intelligence (AI) technology to cut costs in its auditing procedures. The firm has recently acquired another company to help with the digitalisation process. This would represent a major change for the company, where 20% of its workforce are qualified dentists.*

Source: Company meetings

With an oversupply of dentists in Brazil, OdontoPrev has been able to spread its treatment among large numbers of dentists that are underutilised, rather than rely on a smaller few who then charge higher fees.

E-Commerce in Latin America

Retail across Latin America, as with almost every other part of the globe, is being transformed by the arrival of e-commerce.

The US, where Amazon continue to dominate, is often taken as a reference point, but Brazil appears to be following a more global path and as a consequence is unlikely to see a winner-takes-all outcome.

One of the reasons for this is that Amazon, which benefited from pre-existing infrastructure in the US and was able to leverage off private logistics providers, has struggled to make inroads in Latin America, where the infrastructure is still developing. In Brazil for example, it has had to rely on the domestic postal service, where delivery times can be up to 10 days. This has led to a number of local competitors showing real ingenuity as they develop their own approach to logistics. One retailer we spoke to, Magazine Luiza (not held) is leveraging off its bricks & mortar network and has been conversing with Chinese e-commerce giant Alibaba (also a strategy holding) as it considers this approach. Other companies, such as e-commerce specialist B2W (not held), continue to develop their own full-scale logistics platforms.

Embracing Technology

One aspect of our research in Latin America that has had a lasting impact was the sense of vibrancy in both Brazil and Peru. We were pleased to see that the companies we visited all had extremely young workforces which are adopting new ideas – and new technology.

One financial sector company we spoke to has launched a dedicated digital bank, as only around 4% of its transactions depend on employees and branches. The most prominent example, however, was in Peru, where BCP, a subsidiary of financial group Credicorp (held in the strategy) is undergoing a ‘transformation’ project. Its InnovaCXión Center’ in Lima has grown from around 20 people in 2013, to more than 100 people today. Its purpose is to develop disruptive technologies with the aim of improving customers’ digital experiences. With 61% of personal loans at BCP originating through digital means last year, there is already a clear tangible impact from its approach.*

BCP is also embracing a culture change. As the company celebrates its 130th birthday, it is focusing not just on growing its well-respected brand in Latin America, but on selling itself as a great place to work as well.

One aspect of our research in Latin America that has had a lasting impact was the sense of vibrancy in both Brazil and Peru. We were pleased to see that the companies we visited all had extremely young workforces which are adopting new ideas – and new technology.

Optimism Returning to the Region

A consistent theme throughout our research in Brazil and Peru was the sense of optimism. In the boardroom, we spoke to businesses which are more confident about the future – due to the potential for economic reforms (such as the much-vaunted pension reforms in Brazil) and an improving economic backdrop. It was also clear from conversations elsewhere, from taxi drivers to people on the street, that there are reasons to feel more positive for the future.

In Brazil, despite the negative headlines associated with the election of the right-wing president Bolsonaro – there is a feeling that better times are ahead after years of political mismanagement. This positivity was echoed in Peru, where the economic backdrop has been stronger in recent years.

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From an investment perspective, our trip left us with higher conviction in the strategy’s current holdings, reinforced the vital role which technology will play and introduced new ideas for further company research.

…there is a feeling that better times are ahead after years of political mismanagement. This positivity was echoed in Peru, where the economic backdrop has been stronger in recent years.

Important information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice.

Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
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