LatAm Markets Poised for Growth if Key Infrastructure Changes Are Made

Investors of all sizes and geographies want to grow their investments into the Latin American region. That’s the key takeaway from a new survey by Nasdaq and The ValueExchange, which found 84% of buy-side respondents plan to increase their volumes in markets like Argentina, Brazil, Chile, Colombia, Mexico and Peru.

However, inflows are coming up against obstacles as market participants are hindered by operational complexities: 59% of respondents face market structure-related challenges that block or limit their investments.

To solve these problems, greater regional cohesion and automation is needed to increase efficiency and reduce fragmentation. As with many emerging markets today, regional standardization has an important role to play in unlocking greater foreign investment and maturing LatAm markets.

Investment growth opportunities across Latin America

Investment flows from Europe, APAC and North America are expected to increase 16% on average in the next 12 – 24 months, outpacing growth seen in the two years prior. Our survey found that institutional investors (firms with more than $1 billion AUM) and wealth investors (those with less than $1 billion AUM) alike were keen to grow their exposures, with 80% of the largest firms expressing a desire to ramp up investment.

The buy-side is drawn to LatAm markets for a variety of reasons:

• 78% of APAC investors are driven by attractive investment returns
• 38% of European investors are driven by ESG investing and diversification opportunities
• 30% of North American investors are driven by index tracking opportunities

The diversity of strategic drivers is also spreading investment across the region:

• Attractive returns were the primary driver for 65% of investors active in Chile
• Investment diversification was the primary driver for 43% of investors active in Brazil
• Index investing was the primary driver for 33% of investors active in Argentina
• Client mandates were the primary driver for 22% of investors active in Mexico

Firms also exhibited a range of drivers according to their size. For example, while institutional investors were almost uniformly driven by attractive returns and valuations, small-to-medium wealth firms (firms with $1 – $500 million AUM) were more likely to cite diversification opportunities or passive and impact investing.

Market structure in focus

Despite this appetite for increased investment, investors are challenged by LatAm market structure and the resulting inefficiencies. Process and platform fragmentation leads to costs, complexity and risk that makes growing investment a difficult proposition to follow through on.

These inefficiencies center around three main obstacles that are placing a damper on activity. Solving for these issues will be crucial to unlocking increased investment:

• Lack of straight-through processing (STP), wealth investors had 52% STP rates on average across the region, while even institutional investors were challenged by lagging STP rates in a few core markets.
• High error rates, manual workflows and lack of standardization can lead to excess error rates that complicate day-to-day operations; for example, 67% of respondents said they experienced an unreasonably high rate of settlement failures.
• The cost of complexity, high fixed costs and intensive workflows limit scaling; 288% more work hours were needed to manage LatAm investments when compared with developed benchmark markets, meaning complexity requires almost a full-time position.

Regionalization can unlock growth and deliver savings

The way forward for Latin America is straightforward but it will require collaboration. Alignment, harmonization and standardization is needed to foster a new operating model for the region that will facilitate activity while also making markets friendly to operations large and small.

In order to reach this desired state, respondents prefer a mix of harmonizing rules and processing while consolidating platforms and account structures. With regionalization, they foresaw 11% cost savings on average, with big potential for savings in areas like collateral management, securities lending, corporate actions and settlement.

In sum, the harmonization of post-trade processing activities will be a core component of a new operating model for Latin America to unlock flows and access that may serve as an example for global emerging markets.

Read more by downloading the full report to get further analysis.