On October 2, 2012, Chevy Chase Trust hosted ?Defying the Global Slowdown: Seeking the Next Opportunities?, a luncheon featuring Philip Tucker, Spencer Smith, and David Ross. Listen to the discussion and/or view the transcript below.
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Welcome and Introduction- Stacy Murchison, Managing Director
STACY MURCHISON: Thank you for coming, everyone, and thanks for braving this inclement weather. And please continue eating your soup as I chat. I?m Stacy Murchison from Chevy Chase Trust. I?m the managing director there and our program today is ?Defining the Global Slowdown; Seeking the Next Opportunities?. We?re fortunate to have three in-house experts who will tackle this subject matter for us over the next thirty-five or forty minutes.
First, I just want to mention a few important points about Chevy Chase Trust for those of you who don?t know us well yet. We?re first and foremost, an investment management firm. And we parenthetically have trust powers. About 80% of the folks who are coming to us now are coming to us for those investment management services. And about 20% are coming to us for those more traditional trust services. Financial and estate planning are a vital part of what we do. The important work that we do for our clients and estate and financial planning have been fully integrated into our process. And I do want to point out for the lawyers in the room, we don?t replace anything that you do. We don?t do any drafting of documents. And for the accountants in the group, we don?t do any individual tax returns either. But we do compliment the work that you do for clients. We have about seventy employees, all located in Bethesda under one roof and that means that all the decision makers are in the same building including our owner and working together to do the best we can for clients. We?re thematic investors and we buy individual stocks and bonds for client portfolios. We do not adhere to Style Box investing. We don?t have any house products and we do not rely on the manager of managers approach that so many do. Instead, we employ a multi-cap strategy that allows us to buy the very best businesses in the world, anywhere in the world, that would benefit from our themes. So, it?s pretty straightforward but we feel very compelled by this method of investing for clients. Our differentiator is that we are big enough to have a really deep bench of experienced professionals, analysts, portfolio managers, financial and estate planners, client service professionals; but we?re small enough that our portfolio managers can actually develop customized portfolios for clients. All of our professionals can work directly with clients and do everything on a customized basis. We give unparalleled client service and I think that?s really what makes us stand out. Other organizations try to do what we do but we don?t think that they?re doing it quite as well as we are because some of the time, they?re using neophytes and we are really using seasoned professionals.
Our speakers today are really great examples of our deep bench. So I?m pleased to introduce first, Phil, right here. Phil Tucker, who is our chief economist. Phil had long and distinguished court career with the Bureau of Economic Analysis and after that, had his own family and friends investment management practice that he subsequently sold to Chevy Chase Trust. So, he, when he joined Chevy Chase Trust, became our co-architect of our multi-cap strategy that I?ve been mentioning. He is going to speak with us and give us an overview of the global economy and where we should be investing. And he?s going to do all of that in ten minutes so you know that no neophyte can do all of that.
Next, we are going to hear from Spencer Smith, a senior portfolio manager. And Spencer came to us via Fiduciary Trust where he was the head of the office and was doing investments for high net worth individuals. Spencer shares responsibility for the development and the oversight of our investment process and strategy. His background includes a Fulbright in Budapest and he has two master?s degrees, one degree is one from Yale and the other from GW. Spencer will be speaking about the European crisis, a small matter and the possibilities today.
And finally, we?ll have David Ross who is our Latin American expert and a Senior Portfolio Manager. David has spent more than twenty years studying Latin America. He became intrigued by Latin America very early in his career and understood the incredible possibilities from that region of the world. He often travels to the area. He is a frequent speaker at international conferences. As a matter of fact, he is going to be taking a group to Bogota in February to a conference where he will be speaking. He has a Master?s degree from Syracuse. He is a chartered financial analyst and he will be speaking about Columbia, Peru, and Chile and not only about the growth there but also about the opportunities, the investment opportunities that we?re saying there. So, the conclusion of our presentation, we will certainly open the floor up and answer your questions and this whole program should last about an hour. So please enjoy your meal and Phil will get started right after our main course is served.
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The Global Economy- Philip Tucker, Chief Economist
PHILIP TUCKER: Good afternoon everyone. I?m going to cover the global economy and U.S. economy and some investment implications and there are a few numbers? I hate giving you all numbers because they?re boring, and they?re a great cure for insomnia, and they?re just really pretty horrible. But these numbers are really important and they are very fresh and new. The latest one just came out Friday and they are not really great reading. But I think it?s important that you all know them. So, here they are.
The global economy is slowing down very rapidly. We expect a 2-1/2 percent growth rate in 2012 and probably a little less in 2013. This is down from a 3.9 percent growth rate last year and 5.3 percent in 2010. These are really crucial numbers. In 2010, the growth of world economy ? not the U.S. ? was 5.3 percent and it?s going to be coming in at half that this year if we?re lucky. And this is in measures that usually a quarter of a percent or a third of a percent is considered a lot, and a tenth of a percent is considered normal. We?re coming down virtually fifty percent from the 2010 growth rate. This is a very, very serious global situation and it?s not much better in the United States, I?m afraid.
The government?s stimulus programs, the pressure on consumer balance sheets, financial turmoil in Europe, and in general lack of confidence in our institutions is attributable to all this weakness. GDP growth in the U.S. will probably not even reach the global growth rate of 2-1/2 percent. Inflation will be a very big issue in the developing countries. We project six percent inflation this year for countries principally the result of increased cost of food and other commodities. The increased cost of food is a really big deal. It?s a huge part of the household budget abroad in developing countries. It?s half or more. In the U.S., it?s a much smaller part. We don?t feel it but we will be feeling it. It?s growing. It?s going to be very significant next year. So, be prepared for that.
In our view, the increased cost of food explains many of the political issues throughout the world including China, India, and the Middle East. We haven?t seen any long-term studies that deal with psychology in the living standards of people and their attitudes with regard to food and how scarce it is. But the anecdotal evidence is really compelling. There?s hardly an on-site interview that does not emphasize the scarcity of affordable food as the cause for their protest. The food issue is the highest priority item at the World Bank meetings in Washington last week.
In Yemen, more than eighty percent of the country goes to bed feeling very hungry. Yemen is on the border of Saudi Arabia. It has the highest, or one of the very highest, incidences of people who can?t read or write. It also has a demographics of young people that is vastly more than older people. So, it?s a young society that is uneducated with also among the highest per capita arms ammunitions inventory as well as serious terrorist organization. I think we?re beginning to see news about Yemen in the paper. I?ve been talking about this country for about a year and a half. It?s now becoming very clear that it?s going to be a problem. It borders on where most of the oil supplies of the world come from.
So, we?ve got some difficulties there. I want to talk about the U.S. economy, too. I have to cover quite a lot of territory very quickly. We estimate the U.S. economy at two percent the first two quarters of this year where two percent in the first and 1.3 percent in the second. This is a gigantic drop. This is in terms of GDP and growth of economies, is a quarter of a percent, a tenth of a percent is a huge change and to move this economy which is very large, you need massive movements with the capital and the expenditures to effect that 1/10 of a percent move. And we had a drop from the first quarter because the second quarter this year was 4/10 of a percent. This indicates a very sharp weakening in U.S. domestic production. And this is the third estimate. So it?s likely not to be revised very much.
This is a very serious point. I don?t know why it?s not getting more attention. I think when people reflect on it, they?re going to have to deal with it. Restoring healthy economic growth in the U.S. requires a significant increase in the labor force in light of the immense federal government stimulus. Compared to prior recoveries, the economic rebound has been very unimpressive. It?s revealing at how complex and deep-seated the issues are. We?re growing at two percent. After unprecedented government fiscal and monetary stimulus and past recoveries, at this time we would be growing at four to five percent, perhaps six percent. That?s enough to tackle new entrance into the workforce as well as dealing with an unemployment issue. We?re far from that.
In our view, the consequences of the collapse of the residential housing market were not fully appreciated. We are reversing a bubble in housing that has a way to go. The multi-year 2002-2007 growth in housing has extraordinary impact on production and growth and services in the U.S. and in many foreign countries. We may be bottoming out now in demand and in prices, but I don?t think so, but it?s possible. It?s the same sort of phenomena in statistics compared to the prior two years. There is some strengthening in the spring and [this is in demand] but then they gave it back. This one looks like it has some traction. We may hold on but we?ve got a way to go here. And it was a big mess on the part of the republican and the democratic administrations. It was a gigantic mess on the Obama administration.
We never ran through the collapse of the U.S. housing market through the input-output accounts. Had we done that? these are accounts that trace the intra-industry and the effect of any event in the economy. They were used very effectively during the oil embargo. And in fact, the policies that descend from that allowed us to get right through the oil embargo. In any case, nobody ever used it. I chatted with the people at the Bureau of Economic Analysis and I asked, ?Why didn?t someone do this? Housing is thirty percent GDP of the country. It?s clearly a major if not the singularly most important thing associated with this downturn.? And they are absolutely puzzled with this. They offered to do it, so it?s a complete mess I think on the parts of the administration.
If we have reached bottom here, that would be a big plus, so we may be able to get out of that. But we?ve got big problems abroad in housing and residential real estate, and I?m just going to cover just a couple of little things really quickly here. In Canada, for example, housing is off the charts in many parts of the country. And the balance sheets of those people there are much worse than in the United States. Their debt levels are very high. Housing, for example, the percent of household income is ten times to eleven times the household income in parts of Toronto, Vancouver, and other places. Put that in perspective, the proper amount would be five times the income. So, it?s more than twice? housing is more than twice income in parts of Canada and the balance sheets of the consumers are not as good as they are in the United States. The government?s in good shape but not the consumers.
China is not much better off. There are huge inventories of unsolved apartments in many cities throughout China, so there?s a huge inventory overhang. In parts of Brazil, the prices of housing and commercial real estate in some cities is equivalent to Manhattan and obviously, the people there don?t have anywhere near as much money as the people in Manhattan. In the Netherlands, there?s enormous bubble in housing. There?s a recent drop of eleven percent very quickly. So, this is all over the world. There?s still many real estate issues to deal with and the worst being in Spain which is virtually in a depression. All the data point to depression. And it?s almost exclusively because of a huge housing inventory.
Now, all this would be manageable if peripheral income was strong and moving up. But unfortunately, personal income is also under stress. There?s been a secular, continuous, multi-year, multi-decade downturn in wages, salaries, and benefits. This is very important because other countries? incomes, dividend income, rental income, entrepreneurial income, all kinds of other incomes, and that?s held up easily. But for a healthy economy, you need wages, salaries, and benefits. They were about sixty-four percent of personal income now; in the 1970s they were seventy-five percent. So, you have a diminishing amount of personal income from wages but it?s a lot of pressure on most of the society. And they?re additionally going to be faced with the increased cost of food, other commodities, energy.
In my view, the inflation which is not present right now, is going to pick up remarkably in the years to come. And it will affect the middle class heretofore never affected in a significant way unless it was a leverage to a particularly overpriced investment like real estate. The middle class basically escaped but they?re not going to escape in the future in my judgment. And I think they?re going to face a significant cost of living and state of living and state of living in the future. So, this is a very big item down the road and we should be prepared for that.
So, there?s no sugarcoating it. I tried to pick out some things that look good. I think the U.S. economy long term once we get through this, as I will mention in a minute or two, looks very good because of our domestic energy resources. But we really do need some leadership, and we really do need some very concrete policy initiatives right now. You know that from the papers and just being pretty savvy people anyway from your professions.
Where do we put our money? It?s not easy. But the best strategy we think is to put your investment funds in sectors of the economy that are growing faster than the overall economy. And it should be concentrated on products and services that are necessary or very desirable for which substitutions are not readily available or are inadequate and that?s a broad statement. But let me concentrate on a few that I think are very desirable. One sector is energy. The existing oil field depletion rates are underestimated in our view and discoveries will not fill the gap. That?s an emphatic statement. Big discoveries but they won?t fill the gap. This virtually guarantees that the companies having reserves in politically safe areas are going to be very profitable, not right now but in the near term. By mid decade, the supply and demand disequilibrium will become evident to everybody and by 2020, there will be substantially more demand worldwide than productive capacity.
The second is work. This is a developing crisis that may be even more serious than energy. We are experiencing the worst drought in the United States in seventy years, following a track similar to the 1930s Dust Bowl. Drought has also spread throughout the world in Europe, China, and other parts of Asia. In the United States, the impact of a hydroelectric power was so significant that in eight states, we were very close, I mean within days, a couple of states within weeks, of closing down major hydroelectric plants. This would?ve really virtually disabled a significant part of the U.S. economy. People are unaware of the use of freshwater in hydroelectric power. Forty percent of all U.S. freshwater goes into the hydroelectric power. So, when there is a drought of this kind of epic proportions, we are in deep trouble. We are in deep trouble even without a drought because of the aquifers being degraded and the arid conditions in the west which you all know about. There are some great investment opportunities here. Not in the United States for water but they will be if we get our act together. They?re in Brazil and Canada. Both those countries are very well situated for work.
Food availability is another big problem. We are not meeting the world?s needs, and it?s going to get worse as the Asian and American economies develop and their menus improve. A revolution is under way in agriculture and in crop usage. There are a number of companies doing remarkable things in agricultural productivity, and it?s really the only way we?re going to get out of this. The amount of land suitable for farming per capita worldwide is going down, so its supply could only come from one place. It can only come from increased productivity, and that?s going to be from seeds. Seeds come in stacks. They deal with bugs and insects and all sorts of ugly things that destroy things but they also can allow plants and vegetables to grow with minimal amount of water. The Holy Grail will be one that provides for growth of food stuff without any water and that?s probably five or ten years away. But they?re doing tremendous things to allow farmers to develop increased productivity and we?re hopeful on that front. For the companies, there are four or five of them that we are investing heavily in most of these, and they really are the answer to the food and to some extent the water issues.
Healthcare is also a big problem, even more so than the demographics when the demographics take hold. It?s not just the U.S. and Europe, it?s Asia. Japan has serious issues. China also has issues. China has an average age that is much higher than India but both will experience the same problems: medical care and the need for care and housing. China will just experience them earlier.
Finally, there is electrical transmission. The additional power for communication and transportation, electrical cars and what have you added to the normal growth is testing our capacity. Our national grid in the U.S. needs a major upgrade, so do most grids outside the United States. The sectoral trend will be here for quite a while. This is a great investment opportunity. This summer, the power failure in India was the largest ever recorded of any power failure anywhere in the world. It affected 650 million people. Three northern territories of India closed down operations. People, everything came to a virtual collapse, and it took a while to get it back going. This is going to be a major investment theme. It?s developing now. The trust company will be an important one in the future. There are only a handful of companies that are really into this.
So, last point, it?s one thing to identify the areas of growth, another thing to point to the companies which we will address. But you need to buy them at the right price and the right proportion. It makes no sense to buy something that?s already discounted in the future. So, you got to be careful. So, the message here is cash is okay. It?s all right if the manager decides to hold cash. Most people say, ?Well, why am I paying this guy? He?s not doing any counting or label work. What is he doing?? [Laugh]. ?He?s just holding cash.? But you know, that?s a very good option because it allows you to take advantage of opportunities. And that?s why Warren Buffett usually has $30 or $40 billion in his balance sheets. He is able to buy things at the right price. Buying things at the right price is everything and very important.
So, that?s a really skeleton version. I hope you all? if you have some questions, I?m happy to answer and if you have some peripheral questions about peripheral finances and stuff, I?m happy to answer those, too- if you can stand it. So, that?s it. More than 10 minutes. Sorry.
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Europe Multi-Cap Global- Spencer Smith, Senior Portfolio Manager
SPENCER SMITH: So, Phil, I thought I had the depressing assignment but that?s going to be tough to beat. So, Phil gave you a broad overview of how we see the global economy right now and some of the themes that we?re investing in. Both David Ross and I are going to focus down into a particular region. Dave will be talking about a region where we?ve seen actually some particularly promising developments right now. I, on the other hand, will be talking about Europe.
So, to try to put the current crisis in Europe into perspective, I?m going to give kind of an overview of how the European Unity Project has evolved over time and then talk a little bit about how politicians have sold the European project to their constituents over time. And I think that?s really actually critical right now. And I?ll talk about why a little bit later. And then I?ll also talk about how from an investment point of view we?re dealing with the crisis in Europe at Chevy Chase Trust.
So, ten minutes once again, I?m going to give you a nutshell history of the European Union. So, you know, following the devastation of World War II and with World War I still very much in living memory, you know, politicians have the impetus to really try to create institutions which tie the Western European countries together to try to avoid this kind of devastating conflict in the future. And the first institution that was created was the European coal and steel community, and this was back in 1951 at the signing of the Treaty of Rome. This involved six countries: France, Germany, and Italy, the Benelux countries which are Belgium, the Netherlands, and Luxembourg. And so, these countries were trying to bring these heavy industries together in the thought there was that if these industries are tied together, economically it would be much more difficult for these countries to wage war with one another.
Then the next institution that was created was the European Economic Community. That was the end of the 1950s. And this really was the same six countries and it created what was in effect a customs union between those six countries. Then in the 1960s, these two institutions along with the European Atomic Energy Agency merged to form one institution which became known as the European Community. Then in the ?70s, the European Community expands. It takes in the UK, Denmark, and Ireland. And so, by the end of the ?70s, you have most of the major Western European economies in the European community. But at this point, it really isn?t much more than a free trade zone, something akin to NAFTA except for maybe with a little more teeth, but it really wasn?t very deep.
Then in the 1980s, there is kind of renewed energy behind the European integration process and it begins to get much more ambitious in two ways. One, it?s spreading; it grows to include new countries outside the Western European core. And two, it gets much deeper and the super national institutions that are created take on a lot more power than they had before. So, first I?ll talk about expansion in the ?80s. You start to add some of these peripheral countries that we know are in so much trouble now: Portugal, Greece, and Spain are added. In the ?90s, you add Austria, Sweden, and Finland. And then after 2000, a number of the countries of the former communist countries of the Central and Eastern Europe join. And so, you?ve gone from the six countries of the European coal and steel community to the twenty-seven countries that are now in the European Union today.
And then as far as deepening the union and increasing its power, in the ?80s, you have the Schengen Agreement which allows for passport to free travel between most of the countries of Europe. And then really the watershed moment for the power of the European Union, actually the creation of the European Union from the European Community was in 1992 with the signing of the Maastricht Treaty. So, the Maastricht Treaty did a few things. It deepened economic integration between these countries. It created a harmonized legal framework between the countries in the union, and it also created a common foreign security policy. And then finally in 2009, you have the signing of the Lisbon Treaty which really creates a constitution for Europe and you know, which includes a bill of rights. It also increased some of the powers of these institutions.
So, the European Union now has really taken on a lot of the characteristics that you would associate with a sovereign state. You know, it has its own flag, its own currency, its own foreign policy, and etcetera. So, the vision of the people who put together the European coal and steel community? their vision was to unite Europe economically and politically for an end, that was really peace on the continent. And I think what happens over time is that vision as World War II sort of recedes in time. The way politicians are selling this, it was an easy sell at the beginning given how deep the crisis had been before.
But as time goes on, you know, you?re asking these countries that had a strong history of nationalism to give up their national institutions and give them to these super-national bodies. And so, the arguments the politicians start to use as the baton is passed, you know, from that first generation to a next generation of politicians, the arguments that are starting to be used are more economic in nature. And so, it?s a promise of prosperity coming out of this. And this really began in the ?80s. At the time, Europe was growing very slowly. The labor growth was very meager, and this was known as Eurosclerosis. And the Europeans were comparing themselves to the relatively vibrant economies of the United States and Japan.
And so, they were using expansion and deepening of the union as a way to promote the European economies. They talked in terms of, you know, regional advantages. When they talked about a common currency it was because it was going to make international transactions and intra-European transactions more fluid. And so, they started to talk really in dollars and cents terms rather than in the sort of the visionary terms of the original founders. And why this is important today is the sort of [karat] of prosperity that had been held out in exchange for giving up national sovereignty. Well, now you?re in this deep economic crisis after already experiencing the deep crisis, the financial crisis a few years ago. Europe has returned to recession. As Phil said, there are parts of Europe ? Spain in particular, Greece ? that are really in a depressionary environment.
And so, people are starting to ask the question, ?Was this all worthwhile?? And you?ve had, you know, you?ve had sixty years of really tighter integration and now, I think we may be on the verge of some form of disintegration in Europe. And it?s very hard to predict exactly how that might unfold. And in fact, it?s possible that Europe actually will come out of this crisis actually more united in that you know, there is talk for the countries that are being bailed out having conditions that will actually include them giving up their own ability to control their national budget, so it?s sort of fiscal policy being determined by the European Union itself. There?s talk about banking union now. So, it?s possible that if they muddle through this crisis, that you actually end up with a stronger, more united Europe.
I don?t think that?s the most likely case. I think at this point, you?re probably going to see the rise of politicians. After sixty years of pro-European politicians, you?re going to see the rise of the anti-Europe politicians and politicians who will be starting to ask for sovereignty to come back from the center of the institutions of Europe. So, you know, in our view, Europe is? you know, the best case scenario really is its very slow growth for a number of years, but it?s likely to be punctuated by a number of crises. Once again, it?s unpredictable how the European Union might fall apart if it does. You may have countries leaving the Euro zone. You may have countries leaving the European union altogether. Very hard to determine. But obviously, we have to be very cautious when we think of this from an investment perspective.
And this includes? Europe being the largest economy on earth, it affects really all markets everywhere. So, even if we?re looking at a company that?s not domicile to Europe, we have to think about what percentage of its revenues come from Europe and how much of that is denominated in the euro currency that might become very unstable. So, you know, we?re very cautious but at the same time we?re looking for opportunities. Phil talked a little bit about looking at prices as being extremely important. So, acquiring good assets at good prices is a key principle of what we do. And in crises situations, oftentimes you get prices on good assets cheaply. So, that?s one reason that we?re going to continue to follow Europe and continue to consider investments there.
And also, we have to remember that there are a lot of countries in Europe that are not in the euro currency itself. There?s Sweden, Norway, the UK, Switzerland, many of the countries in Central and Eastern Europe. So, there that foreign exchange risk is mollified a bit. But we are very cautious and we?re going to be opportunistic going forward, but it is a very difficult situation and one that we obviously have to follow very closely in all aspects really of our investments. So, I?m going to wrap it up there and hand it over to Dave who hopefully will bring a little more sunshine to the podium.
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Latin America Multi-Cap Global- David Ross, Senior Portfolio Manager
DAVID ROSS: That was tough. Bet you?re all glad you all came down for lunch, huh? Maybe we better take away the sharp utensils from the tables there, Stacy, keep those doors locked so nobody jumps out.
I?m going to spend a few moments to just tell you about an area of the world that things look pretty darn good. That?s in South America and specifically in Colombia, Chile, and Peru. You know, and the title of our lunch, I think, was Defying the Global Slowdown. I think we spent most of the time defining the global slowdown so far. But I just want to talk about some of the really good things that are going on out there. The first thing I?d say is beware of generalizations. You hear it all the time. People will say things like the emerging markets are slowing down or the emerging markets are having inflationary problems. And there are some that are. But there are many that aren?t.
When they?re talking about emerging markets on television, they?re usually talking about four countries: Brazil, Russia, India, and China. And when I look at the global map, there?s a whole lot more countries out there than just four. And the reason that there?s so much focus on those countries is first of all they?re very large and they?re very liquid. And that means that Wall Street can make lots of money by being in those markets. So, they focus a lot of research effort on the very large markets. If you go beyond that and look at smaller markets, like the ones I?m going to talk about like the Philippines, Malaysia, Poland, some of those that are underneath the surface, there are plenty of opportunities because nobody?s spending the time and looking at what?s available out there.
I?m going to talk about, you know, there?s basically three stars in South America. It?s Colombia, Peru, and Chile. But I want to talk first about the one that we really don?t like and that we?ve benefited by staying away from, and that?s Brazil. And again, when people think of South America, they?re thinking of Brazil. But Brazil has basically done everything wrong over the last five or six years compared to the countries that are doing things well. And when you?re investing in emerging markets, one of the key elements is going to be, ?Is there change for the good going on?? Brazil had that when they moved from their dictatorship in the mid ?80s towards an elected government. And when Lula came in, he did some wonderful things that got the economy going. But after that, they?ve kind of moved back into the statist regime.
They?ve had unconventional monetary policy which you know, they?re cutting interest rates as their inflation is going up. They have consumers that are so overly indebted, they make the U.S. look like you know, church [spouses]? church [wives]. Church [spouses]? Where did that come from? Heavy-handed government intervention, things like replacing the CEO of companies like Vale or Petrobras. They misallocate capital through their state development bank, criminalize economic activity. Last year, Chevron had an oil spill of 3700 barrels out in the ocean, and Brazil decided that they were going to put their executives in jail, tried to fine them $20 billion. All things that are not good for economic growth. You know, we?re starting to see a little bit of change from President Rousseff in this regard, but until we really see a substantial change, we?re going to stay away from that story.
Where things are going well though, we?ve seen this permanent change. And the first country I?ll talk about is Chile. Chile right now has a GDP that?s growing at 5-1/2 percent, well above what the rest of the globe is seeing. Chile really got its change when Pinochet was kicked out of office back in 1990. And then they moved towards a real vibrant democracy, market economy, and it really took off. And Chile got about a ten-year head start on everybody else because of this.
Peru is next in the category, and they?ve got an economy that?s growing close to seven percent right now. It took them about 10 years later in about 2000 when they kicked out Fujimori, their dictator. And then finally, they beat the terrorists, the Shining Path. They don?t really exist anymore. And the country?s economic growth took off over the next ten years.
Colombia is the third one and they are still in their process of change. They?ve had a minor disturbance going on for the last fifty years, war with the guerrillas, the FARC. But they?ve started a peace process that we think is going to be substantial and add to GDP growth, possibly two to four percent. Colombia is already growing at five percent.
So, you know, when you look at the rest of the world growing in a two percent clip, there?s plenty of opportunities here. These are economies that are growing because of internal domestic demand. You know, if you?ve been at war for fifty years and you?ve been afraid to leave your city at night and travel five miles outside of town, when the security improves you start feeling like spending money. And in Colombia, for example, we?ve seen auto sales for the last three years up sixty percent a year. I don?t know where they?re driving all these cars because there are no roads in Colombia. Every time it rains, they get washed away. But they?ve got plenty of cars.
Just a little story about Peru, which again has had this tremendous growth rate. One of the things that you watch for in these economies are things like auto sales, cement sales. And I was visiting with a cement company and they were telling me you know, how the two thirds of their sales go to auto construction. And I?m thinking, ?You don?t build cars out of concrete. You?re trying to pull one over on the Yankees here.? And since I just smiled, he said, ?No, this is a very important segment to us.? And I?m thinking, ?Oh, yeah, sure.? And then finally, I said, ?Well, how many of us do you really fool with that statement?? And he said, ?No, auto construction, that means you know, when people get money they buy a bag of cement and they add it on to their house. We call it auto construction here.? Okay, boy, there must be a lot of those dumb Yankees, huh?
So, you know, all these countries are signing free trade agreements. Colombia signed one last year with the U.S. They?re signing one with Asian countries as we speak. You know, we also are finding tremendous natural resources in these countries. Colombia is becoming an energy powerhouse. You know, Phil talked a little about the importance of water in hydroelectricity. Colombia is a country that produces seventy-five percent of its electricity through hydroelectricity. And so, they basically are exporting all their other energy sources. They?ve doubled their oil production over the last five years from 500,000 barrels a day to close to a million. They?re even to the point where they are exporting natural gas to Venezuela. And if a place like Venezuela is importing energy sources, you know there?s something wrong with that economy.
The other story that Colombia has going for it, the Financial Times just mentioned it yesterday, tremendous shale gas possibilities. This will allow this country to really move from just being a natural resource provider to really becoming a manufacturing source with cheap resources to fuel their plants going forward. So, this leads me to how we can take advantage of this. Many investors aren?t investing in these countries. They don?t find it worth their time to be there. I was talking with a very large fund manager earlier this year. I won?t mention their name. But he said, you know, ?I love Colombia.? But he said, ?It just isn?t worth my time to spend the research to buy a quarter of a percent position because that?s all my fund could absorb in their markets.?
At Chevy Chase Trust, as Stacy was saying, we?re large enough to be able to do the research on the ground in places like this but we?re small enough where we can make a meaningful investment with these companies. And we operate with a private equity viewpoint in public markets there which means we work very closely with our companies. We?ve had long-established relationships. One of our companies, the CEO retired. The day before the new CEO is taking over, we had an hour-long conversation with him about what his priorities were going to be. And we?re going to meet with him in two weeks in New York. We?re having an event at the stock exchange and again, we have an hour, a private hour set up to discuss with him and the CFO where they?re taking the company.
So, specifically, what I would suggest that people watch for in this area, it?s going to be a fantastic area to invest in, we have first? there?s a tax reform bill coming to Colombia this week. It?s being introduced in the legislature. That?ll be a positive for GDP growth. Number two, we have the peace process. President Santos has started a peace process with the guerrillas. And unlike previous attempts, president Santos is a real poker player. I mean that in every sense of the word. He knows? you can?t bluff this guy. And if that goes through, we can see an additional two to four percent added to the GDP that?s already growing at five percent a year.
And then finally, what us in the Latin America area focus on is coming up. It?s our Super Bowl this Saturday which is the Venezuelan elections with Hugo Chavez versus Capriles. We?ve long viewed that this race was going to be much tighter than what the official polling data was showing, and we?ve seen it really tighten up. In the internal polling that the challenger Capriles has, it shows that he has a ten-point advantage over Chavez. Venezuela without Chavez is probably the best investment opportunity on the planet. It?s a country with tremendous resources and the best way for investors to play it is through Colombia where the expatriate community has really set up shop in Bogota.
And as soon as there is no Chavez in Venezuela, we?re going to have basically a gold rush with Colombian companies crossing the border and exporting goods into Venezuela.
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