Financial model

Interview with Cassio Antonio Calil, president of JP Morgan’s asset management unit, Brazil

©REUTERS/Paulo Whitaker

Anyone wishing to gauge Brazil’s status as one of the world’s most lucrative emerging markets should look at the growth of its financial sector. 

Industry figures show that the country’s banking sector grew by 317% in 2005- 2010, compared with 244% in Russia and 155% in China over the same period.* They also show Brazil’s stock market going through the ceiling. Trade values rose from BRL400 billion in 2005 to over BRL1,600 billion in 2011. Can and should Brazil keep up this pace in light of global economic uncertainties?

Cassio Antonio Calil is sanguine about the country’s prospects. As president of JP Morgan’s asset management unit in Brazil, charged with expanding the firm’s mutual funds, hedge funds and private banking businesses, he applauds the government’s decision to give a wider berth to private and corporate borrowers, ending the “crowding out effect” caused by its hefty borrowing, which had pushed interest rates out of reach of almost everybody.

By giving investors more room, it has quickened their appetite for risk. “Spread products will be the most promising for years to come,” Mr Calil suggests. “Non-spread products are offered by the government, and investors are searching for ‘alpha’ within the spread products. I don’t know how fast this will grow, but it’s very interesting. People are taking more risks.”

Mr Calil joined JP Morgan in 2004. In mid-2011, he took over the asset management unit based in São Paulo. After nearly 24 years honing his skills in financial markets in Asia, Europe and North America, Mr Calil, a native Brazilian, felt the call to return home, inspired by the country’s unflagging growth and the promise of things to come. He is one of a growing number of expatriate Brazilians whose expertise in global financial markets is being sought out to develop the latent opportunities at home.

Where are those opportunities to be found? “Brazil’s mutual fund industry is the seventh largest in the world,” says Mr Calil. “The industry is worth US$1.1 trillion, and another $300 billion are invested directly in securities outside of mutuals. If all fixed income in Brazil continued to grow at a rate of 10% per year, the sector would grow just with the rate of return from these savings.”

When asked how Brazil kept its head above water during the 2008-2009 economic crisis, even rising above the waves last year, registering its highest growth rate in a decade, he points to Brazil’s fiscal discipline via its primary surplus–the government’s net borrowing and lending, minus its interest payments. “Brazil has been running a primary surplus for a very long time: about 2% of GDP, and remember that this excludes interest rates on servicing government debt. It has also accumulated sizeable foreign reserves over the last 10 years.”

These same factors ought to act as a bulwark against the crisis in the OECD area, particularly the euro zone, and ease worries about its impact on the Brazilian economy. In Mr Calil’s view, there is little to worry about. “The export component to Europe is very small. From the viewpoint of trade, Brazil is not highly dependent on Europe. Our most important trading partner is really China. Brazil exports around 10% of its GDP and soybean and iron ore account for about 60% of its exports. Obviously, those are not going to Europe.”

In the global stock market, the sand in the hourglass has been turned and is running in Brazil’s favour. Mr Calil points out that the MSCI Global Equity Indices, which measure the performance of 1,600 global stocks, allocated a tiny 1% to Brazil in 2006. “But that rose to 2% in 2011. If you look at Europe, it was 19% in 2006 but fell to 16% in 2011. In the UK it was 10% in 2006. It is now 8%. So the market share that the UK, the US and Europe lost has been taken up by emerging markets.”

Brazil’s financial market may be putting on muscle, but it has vulnerable areas. “Brazil needs to become a better services economy,” says Mr Calil. “There is a growing demand for services, such as hotels, airlines, and accounting and legal services–even plumbing. Education is an area that especially needs attention.”

“If we want to catch up with India or Korea, we need more private investment, so that the government doesn’t have to do it. We also have the PAC–the Growth Acceleration Program initiative–which will reach over $570 billion in investments by 2014. What we need to do is to keep investment rates above 25% of GDP. If you look at China, the investment rate is 48% of GDP.”

But exaggerated growth rates have a nasty tendency to produce bubbles. Does Mr Calil foresee a sudden reversal of fortune? Not in the near future, but he does admit that Brazil’s capital markets could use some tweaking, particularly through more developed rules within the Brazilian capital markets to support “conduits”–financial vehicles such as mortgages which hold asset-backed debts financed by short-term loans. But he is confident that Brazil will tie up those loose ends. “The world is beginning to accept Brazil’s economic model,” he says. “I’m very optimistic.”

* Ministry of Finance (April 2011), Brazilian Economic Outlook for 2011.

Visit www.jpmorgan.com/pages/jpmorgan/brazil/en/home

More information on the Brazilian economy: www.brazil.gov.br

©OECD Observer No 287 Q4 2011




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