Monthly Report-Apr 2000,etc
Morgan Grenfell Lat Amer Co Tst PLC
11 May 2000
The Morgan Grenfell Latin American Companies Trust supports the AITC its
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REPORT FOR THE MONTH OF APRIL 2000
SUMMARY
During the month of April, the MSCI Latin America Free Index fell by 9.1% in
sterling terms in a sell-off initiated by a significant correction in the
technology-heavy NASDAQ in the US, down over 17% during the period. Within
Latin America, the main impact was felt in the telecoms, media and technology
stocks which had been beneficiaries of the NASDAQ rally, and in the larger
markets of Brazil (down 11.6%) and Mexico (down 9.3%). Other world markets
were hard hit in April, with the global MSCI Emerging Markets index off 7.9%
and the developed markets of MSCI World down 2.5%.
Our NAV fell by 10.5%, underperforming the index; we were hit by our
overweights in the Brazilian market and by our exposure to CTC in Chile. The
share price declined by 13% as the discount widened from 16% to 20% due to
increased volatility.
Apart from overvaluation on NASDAQ, investor sentiment has been affected by
the stronger than expected growth in the US and signs of building inflationary
pressures, which have increased the likelihood of the US Federal Reserve
raising rates more aggressively in the near term. While we acknowledge that
Latin American markets will be unable to make much progress in the face of a
volatile US market, particularly if the hoped-for soft landing is not
achieved, we believe that absent a major US slowdown the region's own
fundamentals are extremely positive for 2000 and beyond, which should
ultimately be reflected in valuations.
BRAZIL
The Brazilian market was the major casualty of the April sell-off, affected by
the high concentration of telecoms stocks in the index. The real also lost 4%
against the dollar as a consequence of the NASDAQ-related turbulence. Brazil
was hit hard mid-month as the Supreme Court initiated a ruling on a
potentially large but obscure fiscal liability (FGTS, relating to
adjustments to workers' accounts from the 1980's), which spooked the market
considerably. However, the Supreme Court has postponed considering the issue
further for another month, leaving time we hope for some political
compromise to be found. Other news in April was highly positive. IPCA
inflation for March was as low as 0.22%, or 6.92% annualised; we have since
seen even more encouraging inflation figures for April relating to the Sao
Paulo area. The Q1 2000 consolidated public surplus was well above the IMF
target. Industrial production grew 16.3% in February, led by orders for
durable and capital goods, and car sales rose by 4.3% in March in further
evidence of the domestic recovery. Trade figures have also been good due
to a stronger export performance. The Central Bank left overnight rates
unchanged at 18.5% for April in the light of inflation concerns in the US.
In specific stock-related news, we have seen good Q1 2000 results from many of
the companies in our Brazilian portfolio. Steelmaker Gerdau expects demand
for its long steel products, used in construction and infrastructure, to grow
by 7% this year. Brazil's leading brewer, Brahma saw its merger with rival
Antartica approved to create Ambev, the world's 3rd largest brewer with over
75% market share. And in an indication that Latin America is still a favoured
destination for international companies, US power company AES, with its
partner EdF of France, has offered to buy out stakes in power distribution and
generating companies in Brazil which they already control for a total of
US$1.35 bn.
Our performance during the month was hurt by adding aggressively to Brazil
just before the market crumbled. Our big telecoms overweights were
particularly affected, as were our holdings in Unibanco and CSN, although
Brahma, Banco Itau, CVRD and Gerdau held up well.
MEXICO
Continued evidence of a strong domestic recovery came through in Mexico, where
retail sales rose 16.5% in February. Industrial production showed a 9.7%
expansion that month and the Central Bank announced it is expecting GDP growth
of between 6% and 7% for Q1 2000. Inflation for April came in at 0.57%, the
lowest since 1994 and finally showing twelve month inflation in single digits,
at 9.73%.
Lower inflation translating into real wage gains is allowing Mexican producers
to achieve real price increases in many segments. This was confirmed by
excellent Q1 results from Femsa, Modelo, Cemex and Kimberly-Clark. Strong
aggregate demand is also being met with real production increases. However,
as we expected, interest rates have begun to rise, with 28 day Cetes now above
14%.
There was good news in the banking sector; Congress passed two key bills, the
Bankruptcy Law and the Guarantees Law, which should allow for a more rapid
recovery in banking assets in case of default by borrowers. Banco Santander
Central Hispano of Spain paid US$1.54 bn (or 1.6 x book value) to acquire
Mexico's third largest bank, Grupo Financiero Serfin, which was nationalised
after the 1995 banking crisis. And in an interesting twist in the ongoing
consolidation process in Mexico, Banamex made a surprise offer for its rival
Bancomer, which is already subject to a bid from Spain's BBVA.
During the month, some of the weakest stocks were the major banks, telecoms
and media companies, which had outperformed in previous periods. As mentioned
in last month's newsletter, we had already cut back our exposure to Banamex
and we also trimmed our holdings in Cemex and Desc early in April, in line
with our more cautious view on Mexico.
CHILE
The Central Bank renewed restrictions on the Chilean capital account
(including prohibiting foreign investors from investing locally) for another
year, contradicting earlier indications that they would be eliminated.
However, a law improving minority shareholder protection has now been passed
which was one of the Finance Minister's conditions for ending the
restrictions. The local market is convinced that they will be lifted this
year.
The domestic economy continues its recovery; IMACEC figures showed that the
Chilean economy grew 5.6% in February, industrial production rose 6% in March,
and retail sales grew by 3.3% in Q1 2000.
Annual inflation was running at 3.4% in March, boosted by fuel prices.
Interest rates stayed unchanged at 5.5% from the previous month.
The Chilean market overall was fairly defensive in April, falling by only
5.4%, although the peso was weak. However, our holding in telecoms major CTC
was hard hit, in line with telecoms throughout the region.
ARGENTINA
The Argentine market fell 7.3% in April. Export and industrial production
data (up 4.1% in March, up 3.2% Q1 2000) were favourable, but they were
overcome by the events in the US and other local data releases. Credit to the
private sector fell 8.9% YOY in March; unemployment looks likely to rise in
May from 14.5% last year; and recent figures on tax collection show
disappointing results. The Senate finally passed the Labour Reform bill,
which should be a mild positive for the economy. Telecom Argentina
(controlled by France Telecom and Telecom Italia) placed $230m or 5% of its
shares previously owned by its employees in the market; we did not take part,
as our conversations with management revealed that our pessimistic earnings
outlook for the company is more than justified. We made no portfolio changes
during the month and remain underweight.
ANDEAN MARKETS
The Andean markets were relative outperformers during the month, mostly due to
a lack of liquidity.
Colombia fell 4.9%; economic recovery is gradually coming through, with
industrial production rising 5.5% in March and tax collection up 12.5% in
February. However, inflation has surprised on the upside, reaching 5.4% in
Q1. Politics is again a concern, with President Pastrana's plan to dissolve
Congress in order to root out corruption and restructure the political system
causing great controversy.
Peru declined by 2.9% in April. The first round of the Presidential election
was extremely close, with President Fujimori gaining 49.8% of the vote and his
challenger Alejandro Toledo 40.3%. Allegations of widespread fraud caused
extreme popular discontent when the results were announced. The Presidential
election will go to a second round on May 28 with the outcome uncertain,
although most polls show Fujimori with a slight lead. The President's party
lost its majority in Congress. Despite concerns, central government spending
seems to have been relatively contained going into the election, and the
economy grew about 8.5% in Q1 2000 after a 10% rise in March. We sold our
entire holding in Telefonica del Peru early in the month, which we reinvested
largely in Brazil.
Venezuela fell by only 0.27% although CANTV was harder hit. Political
concerns are rising ahead of the Presidential runoff on May 28; President Hugo
Chavez remains the favourite but a stronger than expected challenge from his
opponent Francisco Arias has forced him to increase his populist rhetoric.
Some signs of improvement are evident in the economy with industrial
production growing 15% in Q1 but we still have serious concerns over the
government's economic management. AES offered $860m for 51% of the shares in
the leading electric utility, Electricidad de Caracas, which is the second
largest stock in the index. We made no changes to our portfolio during the
month.
NET ASSET VALUE
Fully diluted
30/04/00 31/03/00 30/04/00 31/03/00
88.9p 99.4p 90.9p 99.5p
MID-MARKET SHARE PRICE 30/04/00 31/03/00
Ordinary Shares 72.50p 83.50p
Warrants 22.50p 24.50p
Market exposure
30/04/00 31/03/00
EQUITIES
Argentina 1.3 1.3
Brazil 37.9 41.1
Chile 10.7 10.2
Colombia 0.6 0.7
Mexico 45.7 44.3
Peru 1.9 1.6
Venezuela 1.8 1.6
TOTAL PORTFOLIO 99.9 100.8
Net Current Assets 0.1 (0.8)
------ -------
TOTAL 100.0 100.0
------ -------
Based on total assets less current liabilities of £51.3 million (£58.4
million).
GEARING
Borrowings and Gearing at 30/04/00 31/03/00
£000's £000's
NIL NIL
==== ====
LARGEST HOLDINGS (market value £43.7 million equal to 85.3% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 8,945 17.5
Tele Norte Leste Brazil 2,531 4.9
Femsa Mexico 2,471 4.8
Petrobras Brazil 2,018 3.9
Telecom de Chile Chile 1,974 3.9
Vale do Rio Doce Brazil 1,971 3.8
Tele Centro Sul Brazil 1,923 3.8
Banco Itau Brazil 1,898 3.7
Unibanco Brazil 1,753 3.4
Brahma Brazil 1,558 3.0
Grupo Televisa Mexico 1,471 2.9
Soriana Mexico 1,384 2.7
Grupo Modelo Mexico 1,340 2.6
Gerdau Brazil 1,326 2.6
Telesp Celular Brazil 1,284 2.5
Embratel Brazil 1,265 2.5
Banamex Mexico 1,235 2.4
Kimberly-Clark Mexico 1,109 2.2
Cemex Mexico 1,095 2.1
Alfa Mexico 1,061 2.1
Credicorp Peru 946 1.8
CANTV Venezuela 927 1.8
ICA 5% Conv. 15/03/04 Mexico 762 1.5
D & S Chile 752 1.5
Enersis Chile 714 1.4
FINANCIAL CALENDAR
Annual General Meeting 30 June 2000
Subscription date for warrants 30 June 2000
Final dividend paid 4 July 2000
For further information, contact Rosie Bichard at Deutsche Investment Trust
Managers Limited on 020-7545-6000.
For additional copies, changes of address or details of our Private Investors'
Plan and low cost ISA contact Mark Pope on 020-7545-0520, e-mail address:
mark.pope@db.com. Further details of the Morgan Grenfell Latin American
Companies Trust including the latest annual, interim and monthly reports can
be found on the Deutsche Asset Management website located at www.deam.co.uk
Issued by Morgan Grenfell Latin American Companies Trust PLC and approved by
Deutsche Investment Trust Managers Limited, regulated by the Investment
Management Regulatory Organisation and manager of Morgan Grenfell Latin
American Companies Trust PLC. Investors should be aware that past performance
is not necessarily a guide to future returns, values can fall as well as rise
and investors may not get back the amount they invested. Fluctuations in
exchange rates may also affect the value of your investment. Investment in
Morgan Grenfell Latin American Companies Trust PLC presents those risks
associated with emerging markets which may at times be illiquid and/or
volatile.
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