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Eastern Supremacy in Global Financial Markets – Oct 2017

Author: Daniel Augusto Motta, PhD, MSc, CEO of BMI Blue Management Institute

The Eastern resurgence led by China and India permeates several dimensions, industries and regions. From increasingly mighty super conglomerates to international trade pervasiveness, the Chinese and Indians are essentially omnipresent in the world’s competitive environment, and they are challenging Western powers.

 

Financial markets are particularly suitable for analyzing the Chinese supremacy advance. Considering the evolution of the top 25 global banks in the last 20 years, we notice a remarkable growth rate among Chinese banks —27% yearly— more than twice the world average, 11.5% yearly.

Chinese share of the aggregate capital in these top 25 banks jumped from 3% to 37% between 1998 and 2017, to the detriment mainly of Japanese and European banks. Despite criticism of insufficient soundness of Chinese banks balance sheets —especially related to provisions for Public Sector credit default— it is impossible to disregard the entrepreneurial spur of banks such as ICBC and CCB.

 

The crucial next step in this race might take place precisely in Latin America. Natural resources, energy and food seem to be critical industries in Chinese global expansion planning, and Latin America has plenty of all of it. USA and EU will be increasingly challenged both in supply and demand sides of markets.

 

The growth in China’s economic engagement with the LATAM region in the past decade is impressive. Trade has increased by nearly 2,000% since 2000, leveraged by bilateral free trade agreements with countries such as Peru and Chile. China has also made billions of dollars in loan commitments across LATAM countries. And apart from the decline of the commodities boom, the Chinese government and private sector are not leaving anytime soon.

The next focus of Chinese interest in the region will probably switch from trade to investment. Since 2012, China has already become the third global source of FDI, after only the United States and Japan. China is also increasing its financing presence. From 2005 to 2014, loan commitments totaled more than $118 billion. And the critical question here is still on whether China is the right long-term partner or just a short-term predator.

 

Chinese and Indian growing presence doesn’t have to be a zero-sum game for LATAM countries. First, offers a growing opportunity for LATAM exporters to these huge Asian markets. Second, these super Asian powers also represent a growing source of financing. Third, the large scope for bilateral cooperation can leverage innovation in the region supported by Chinese and Indian enterprises. Naturally, these potential aggregate gains will be accompanied by some pain in certain industries, companies, and countries that might be negatively affected by the rapid growth of the two Asian gigantic economies.

 

From a Brazilian perspective, personally, I would challenge the rationale of allowing Chinese trading and energy companies to dominate agribusiness and energy industries. Land, food and energy are too sensitive matters for a nation to be controlled by foreign companies.

Optimism (in California) about Brazil – Sep 2017

Author: Stephen Scheibe, President All Abroad

While President Temer says Brazil is turning the corner and as Finance Minister Henrique Meirelles jockeys for a possible run for President in 2018 bragging in international meetings that Brazil has its lowest inflation in years and the economy is starting to grow after almost 3 straight years of recession. Indeed, the Brazilian BOVESPA is at record highs and the international investment community is beginning to see opportunity all over. With a broken economy, there are attractive valuations and the post-PT government is breaking down the national populist restrictions on oil and other natural resources. Still on the ground, things are bleak. Unemployment has barely budged. The state has resources only for political bargaining to guarantee that Temer finishes his mandate and all social and economic projects that were supposed to help the less fortunate have lost resources or are being dismantled.

 

In this scenario, it is curious and a bit paradoxical to partake in events that reflect favorably and show optimism for Brazil. I have attended all but one of the Bay Brazil Conferences that have been held in Silicon Valley over the past six years. Margarise Correa, the founder and catalyst for many a Brazil-Silicon Valley connection, and her staff, consistently put together an excellent event with an A list of speakers that always have strong and sometimes surprising connections to Brazil. Many are aware that Facebook’s Eduardo Saverin is from Brazil, but did you know Instagram founder Michael Krieger also grew up in Sao Paulo? This year’s speaker lineup was not an exception, as can be seen from the program: http://www.baybrazilconference.org/#agenda

Silicon Valley nests venture capital and while Brazil is always a challenge, VC firms seek talent, innovation, entrepreneurship and marketing that will lead to profits. In this search, there is no correlation between growth of GDP, political stability, and democracy and VC investment. So Brazil’s macro level crisis is of little import and money will flow where investors find a deal no matter the political economic situation.   This year’s event once again showed deals in Brazil and a growing maturity of Brazil’s VC environment. Since the early 2000’s, Brazil has completed numerous cycles of VC funding and the infrastructure for VC investment is favorable. We find a thriving VC community, accelerators, service providers, mentorship organizations, cloud services, corporate support and perhaps most important investors and success stories.

 

Fintech (High Tech Finance) was this year’s standout sector at Bay Brazil. The basic idea behind FINTECH is that the Brazilian banking and financial market while powerful; it is also replete with inefficiencies and therefore ripe for challenges and changes. The sector is notoriously concentrated and even oligopolistic with high spreads on some of the world’s highest interest rate and outstanding profit margins. The Fintech sector recognizes inefficiencies in the banks and is entering the sector offering major reductions in the cost of credit or funds by taking advantage of the Internet, reliable databases, robust platforms and the ability to evaluate potential clients in an expedited fashion that banks cannot match. Fintechs have found a niche in Brazil (reportedly the world’s second largest lending market) by offering money at a much lower cost and more quickly than the banks. The bank reaction has involved stages ranging from rejection, awareness, engagement, and finally collaboration and acquisition. Along this line, it is perhaps worthwhile to note that Christine LaGarde, the IMF General Director, recently questioned the future of banks with the emergence of electronic currencies and fintech endeavors. So Brazilian banks need to be aware that they also face the tech redefinition that has hit many other industries, i.e. hotels, taxis, travel agencies, newspapers, books and manufacturing, etc.