Investment strategy: Southern charms

Canadian investors set their sights south.

“Like many Canadian banks, Scotiabank’s relationship with the Caribbean goes way back to the 19th century, when Canada sent cod down there and rum was returned. I think Canada got the better deal. The bank had an office in Kingston, Jamaica, before it had one in Toronto.”

Some 120 years later, Rob Pitfield, Scotiabank’s executive vice-president for international banking, presides over a financial empire in Latin America and the Caribbean. “During the past decade, we saw the opportunity to acquire large personal and commercial banking franchises in the region, which provided us with scale,” he says. “We have had an important business in Mexico for a long time and lived through all the horrors that that country’s financial system suffered during 1995. We learned to deal with the worst that can happen to a bank in the region and built up the confidence to expand further in Latin America.”

Today, Scotiabank is the leading bank in the Caribbean and Central America, operating in more than 25 countries. The bank has more than 11,000 staff in the region, serving 1.5 million customers. In Latin America, Scotiabank has operations in Mexico, Chile, Peru and Venezuela and a representative office in Brazil. It has more than 20,000 employees in the region and over four million customers served by almost 1,300 outlets.

Scotiabank is not alone. Canadian companies are investing in Latin America and the Caribbean at a faster pace than ever before — and Canada has become one of the most important investors in the region. Our foreign direct investment there surpassed $117.2 billion in 2007 and $125.3 billion in 2006, according to Statistics Canada. These figures compare with $88 billion in 2002 and $79 billion in 2001.

A large proportion of the Canadian outflow is destined for offshore centres in the Caribbean, such as Barbados and Bermuda, and it is unclear where this capital finally ends up. Canada’s “real” investment in Latin America and the Caribbean, however, is expanding: for example, Mexico and Brazil received $4.9 billion and $8.8 billion, respectively, in 2007, against $3.3 billion and $6.3 billion in 2001. Only the U.S., Spain and Germany are bigger investors in the region.

While Canadian mining companies have a long history in Latin America, the region has also attracted huge swaths of Canadian investment in the financial services and manufacturing sectors. “The current economic deceleration of the United States — today the main foreign investor in the region — is providing an opportunity for Canada to deepen its economic and corporate ties,” says Michael Mortimore, director of the unit on investment and corporate strategies at the United Nations’ Economic Commission for Latin America and the Caribbean. “Canadian companies and their business practices enjoy a favourable reputation in the region,” he adds.

Canadian firms have been implementing different strategies in Latin America and the Caribbean: some have sought natural resources (miners), others have looked for new markets (banks) or have pursued efficiency (specialized manufacturers).

Firms seeking natural resources and bigger markets seem to have performed best in the region, while those pursuing manufacturing efficiency generally have not fared so well. Latin America is awash with natural resources, and higher commodity prices have prompted many Canadian groups to expand existing mines or embark on new projects.

Many Latin American economies — in particular Brazil, Mexico, Peru, Colombia and Chile — have demonstrated an unprecedented level of economic and political stability during the past decade, and their domestic economies have never before expanded so rapidly for such a sustained period. This has created huge opportunities for Canadian businesses, such as banks, which have concentrated on growth in the domestic markets.

Canadian manufacturers have tended to establish a base in Mexico, with a view to servicing the U.S. market under NAFTA. That model has not worked so well because of a slowdown in the U.S. economy and because of the rise of low-cost manufacturing in China and India. It could improve, however, as higher oil prices make it more competitive to manufacture goods nearer to key markets.

Recently, the Ontario Teachers’ Pension Plan has become an important investor in Brazil. In 2005, its real estate subsidiary, Cadillac Fairview Corp. Ltd., started to explore investment opportunities with Multiplan Empreendimentos Imobiliários, a Brazilian property developer. In 2006, it acquired a 46% stake in Multiplan, but this interest was diluted when the Brazilian company undertook a US$1.1-billion IPO in July 2007. Most home builders in Brazil have not performed well during the past year, as a huge number of new developments have come on stream and mortgage lending has become more constrained because of the global credit crunch.

In March 2006, Teachers’ executives encountered Eike Batista, a Brazilian billionaire with interests in the mining and lumber industries. Eventually, Teachers’ became one of the biggest investors in his EBX Group. Teachers’ became the second-biggest investor in OGX, an oil and gas exploration group, which undertook an IPO for US$4 billion last June. The total value of Teachers’ disclosed Brazilian investments is $1.3 billion, although it has additional and undisclosed investments in non-equity asset classes.

Another Canadian group that has suffered from the deteriorating real estate market in Brazil is Brookfield Asset Management, which has a 60% stake in Brascan Residential Properties, a major Brazilian developer. Brascan undertook an IPO in 2006 for US$557 million. Share prices have since fallen 75%. “Some 21 Brazilian house builders undertook IPOs during the past couple of years,” explains George Myhal, managing partner at Brookfield for Latin America. “A large proportion of their investors were foreign groups, which have had to unwind their positions in the companies because of liquidity pressures in their home markets. However, our real estate business in the country is fundamentally strong; its sales are doubling every year.”

In total, Brookfield has assets valued at US$6.45 billion in Brazil. As well as its residential real estate interests, it is one of the country’s biggest shopping mall operators (15 centres in total) and has acquired 500,000 acres of agricultural and timber land. It has also taken a strong bet on the Brazilian energy sector: it owns 29 small hydroelectric plants with combined capacity of 470 MW, is constructing five more plants totalling 120 MW, and has a pipeline of projects that would produce an additional 500 MW.

SNC-Lavalin Group Inc. (TSX: SNC), the construction and engineering giant, has also performed well in Latin America, buoyed by the booming mining sector. “We have 12 projects in Peru and Chile alone, and employ some 2,000 people throughout the region,” says Pierre Duhaime, executive vice-president. “I am very bullish about the opportunities in Latin America.”