Report for Month of July 2000
Deutsche Latin American Cos Tst PLC
15 August 2000
Deutsche Latin American Companies Trust
REPORT FOR THE MONTH OF JULY 2000
SUMMARY
Latin American markets made little progress during July, despite generally
positive local news. After the excitement and euphoria over Vicente Fox's
unexpected win in the Mexican presidential elections, attention turned back to
more prosaic factors, including second quarter earnings releases from many of
the region's major companies, sharp cuts in Brazilian interest rates, and the
fortunes of the US stock market. The MSCI Latin America index fell by 1.2% in
sterling terms over July, although it outperformed Emerging Markets as a whole
after big falls in Asia, and also beat the MSCI World Index (down 1.9%). Year
to date it is practically unchanged (-0.1%). In July, the worst-performing
market was Peru (-3.6% in sterling), still negatively affected by politics,
whereas Colombia rose by 13% (though the market is still down by 23% YTD) and
Brazil was flat. Despite this lack of progress, the Latin American bond
markets have been performing extremely well in recent weeks, and we see this
as an encouraging indication that international investor interest in the
equity markets may return.
Our NAV fell by 2.0% during the month, underperforming the regional index.
Asset allocation was positive, but we were hurt by weakness in several of our
stock overweights, particularly CTC in Chile, Credicorp in Peru and Brazil's
TeleNordeste Celular. Telecoms stocks underperformed generally throughout the
region. A strong rally in the shares of cyclical/commodity companies that we
do not own also affected performance. However, our share price recovered from
its end-June low, rising by 3.2% as the discount narrowed back down to 18.6%.
MEXICO
As we reported in our last monthly report, the Mexican currency reacted
sharply to the Fox victory. It has continued to be extremely strong and is
now back at levels of P9.32 to the dollar from P10 at the end of June,
supported by higher oil prices, lower than expected inflation (July CPI came
in at 0.4% or 9.1% on a rolling 12 month basis) and tight monetary policy.
Short-term interest rates have recently risen slightly to 15.2% nominal (6%
real), reflecting the Central Bank's tightening stance, but are still well
below the 17% they reached at the end of June. Industrial production figures
have continued to be strong. Our principal concern is the growing trade
deficit; in June, despite oil prices at $30/barrel, the trade balance was $4bn
worse than in June 1999 as imports rose by 18% YOY. Signs of a slowdown in
the US economy are also being keenly watched for its impact on Mexico.
Telmex released second quarter earnings figures that were poorly received by
the market, showing a drop in profitability in its core local telephony
business despite a thriving cellular franchise. We are less concerned; it is
clearly in Telmex's interest to present lower profit figures ahead of a
potentially tougher regulatory regime under President Fox. In addition,
Telmex's entry into the Brazilian market and series of strategic alliances
with major international players show that it is preparing itself for the
increasing competition in its home market. Mexico's leading bank, Banacci,
responded to the BBVA takeover of rival Bancomer by using Q2 results to clean
up its own balance sheet even further, preparing itself for a return to
lending in 2001.
The best-performing stocks during the month included miner Grupo Mexico, up
38% in USD after a long period of underperformance following its takeover of
Asarco and weak copper prices. The company announced plans for a New York
listing and was also boosted by better news on copper prices and inventories.
Retailer Comercial Mexicana rose by 21% on strong consumer spending and
takeover speculation. Conglomerates Alfa and Grupo Industrial Saltillo
rallied after a long period of underperformance, and Banacci stock reacted
well to its balance sheet cleanup and to increased optimism on the economy.
Telmex and Carso Global Telecom were both down around 8% in USD, and media
group Televisa and retailer Soriana also underperformed. We used the rally in
the conglomerates to cut our exposure there back to neutral, and instead added
to stocks more exposed to domestic consumption where we consider the medium
term upside to be brighter, such as Kimberly Clark, Femsa and Soriana. We are
still slightly underweight in Mexico overall but will be looking to add on
weakness.
BRAZIL
The Brazilian market was basically flat over the month, falling by 0.04% in
sterling terms, and therefore outperforming the region as a whole. The
Brazilian authorities made two more interest rate cuts in July, so that the
overnight rate fell by 100bp over the month to 16.5% from 19% at the start of
the year. Real rates are currently around 9.5%. The authorities cited the
ongoing lack of inflationary pressures and the improved external environment
as reasons behind their move, but they are also clearly driven by a desire to
see the economy return to higher growth. Despite a higher than expected IPCA
inflation figure for July, caused mainly by supply-side shocks and government
price increases, we expect the rate cutting cycle to continue. The effect of
lower interest rates and the more competitive exchange rate can already be
seen in the economy, which grew by 3.8% in the first half of the year, driven
by the export sector, particularly commodities and agriculture, and strong
industrial production. This growth combined with spending cuts is producing
fiscal results well above the IMF targets for the year, allowing the
government some room for targeted spending ahead of October's important
municipal elections. This week Brazil successfully placed a landmark issue of
US$5.2bn in 40-year bonds in exchange for more expensive Brady debt, thus
significantly improving its debt profile; it estimates this exchange will save
it US$1bn in debt service over the next 10 years as well as releasing over
$300m in collateral. We believe the success of this placement signals renewed
investor confidence in the country's outlook.
As already mentioned, telecoms stocks were weak throughout the region in July
following a global selloff, and Brazilian cellulars were no exception. Bidding
rules were announced for the auction of the PCS licences to be sold off from
December; these were generally interpreted as negative for the incumbent
cellular operators and likely to cause faster consolidation. Unibanco, the
third largest private sector bank in Brazil, bought Banco Bandeirantes from
its Portuguese owners in an opportunistic transaction which will increase its
deposit base by a third. Though the price it paid can be seen as a little
high, it illustrates Unibanco's intention to strengthen its franchise. There
was news of further delays in the sale of Banespa, which now looks unlikely to
be sold for another year. A small stake in iron ore producer CVRD was
acquired by Billiton from George Soros. The iron ore sector has been
surrounded by speculation of further consolidation given the bidding war over
North, which had previously expressed interest in smaller Brazilian producer
Caemi. This week the Brazilian government also raised US$4bn from a secondary
issue of voting shares in Petrobras, placed both in Brazil and overseas.
The month's best performers were leading brewer Brahma, up 24% in USD on
optimism over a recovery in consumption and its even greater market power
following its merger with rival Antartica; commodity stocks including VCP,
Aracruz and Suzano, following a worldwide trend; and steel stocks were also
strong following interest rate cuts. Utilities including Cesp, Coelba and
Light did well on speculation over their financial restructuring and future
sale/buyout of minorities: we are underweight this sector. Banks Itau and
Unibanco had a strong month, while Banespa suffered, along with most of the
telecoms stocks, although fixed-line provider Tele Norte-Leste outperformed.
During the month, we added to our overweight in steelmaker Gerdau, which
reported excellent Q2 earnings. We also slightly increased our holdings in
Unibanco and TeleNordeste Celular, while trimming our exposure to Brahma after
its strong rally. We remain overweight Brazil and very positive on the
prospects for the market.
CHILE
The Chilean market fell by 3.4% in sterling terms during the month. Much of
this fall can be attributed to further weakness in the Chilean peso, which
dropped by 3% against the dollar during the month, and to poor sentiment
following severe floods in June. The economy has shown a continuing recovery
with GDP growing 7.4% year on year in May and rising by 6.1% for the first
five months of the year. This has been reflected in rising imports; however,
inflation has remained benign, unemployment has increased, consumer spending
is sluggish and so the Central Bank has not yet felt the need to raise
interest rates. The recent rise in copper prices will directly benefit Chile,
where copper is still the most important export commodity.
The weakest stock in the market during July was benchmark CTC, which fell by
17% in USD. We still believe that CTC is likely to be taken out by its parent
Telefonica, particularly given the recent resignation of Chairman Juan
Villalonga, as CTC is now the one piece which does not fit into Telefonica's
Latin American strategy. We made no changes to our Chilean portfolio during
the month.
ARGENTINA
The Argentine market fell 3.4% in sterling terms in July. Economic news was
mostly negative, with a month-on-month decline in industrial production in
June, a big fall in auto sales, rising unemployment (15.4% in May, above
expectations and last October's figure of 13.8%), and poor tax collection
figures for July highlighting the deceleration in economic activity. The only
bright spot has been export performance, with the trade balance improving
significantly due to better demand from Brazil and higher commodity prices,
especially oil. Capital goods imports have lagged. Shares in Banco de
Galicia rose by 19% during the month in USD on the approval of the
controversial share swap into the holding company, Grupo Financiero Galicia.
The energy stocks underperformed. We made no changes to our portfolio during
the month and remain strongly underweight in the belief that the full-year
fiscal targets will remain out of reach and that the weak economy will produce
only subdued earnings growth.
ANDEAN MARKETS
Colombia was the best performing market in the region last month, rising by
13% in sterling terms after peace talks with the guerrilla group, FARC,
resumed and the main political parties adopted a more constructive approach
after recent disputes. Industrial production figures showed a healthy rise in
May and year to date (up 10%), and exports are being boosted by strong oil
prices and a weaker peso. Our holding in brewer Bavaria outperformed the
market's rise.
Peru fell by 3.6% in sterling terms as politics continued to dominate the
headlines: President Fujimori was sworn in amidst mass protests in Lima, and
did not make any convincing new policy announcements, though he did present
some changes to his Cabinet team. Although May's GDP growth came in at a
stronger than expected 6.6%, we expect growth to be slower in H2. Inflation
remains subdued despite the higher cost of oil imports. Our holding in
Credicorp underperformed the market, falling by 12% in USD on fears of
deteriorating asset quality. Its second quarter earnings release was
disappointing. We have been reducing our weight in the stock on a slower than
expected recovery, but we believe that the current price does not adequately
reflect its franchise value.
Venezuela fell by 0.6% in sterling terms, outperforming the regional index
ahead of the polls on July 28 which saw Hugo Chavez re-elected as President by
a wide margin. Chavez had earlier announced a 20% increase in the minimum
wage, which has begun to feed through to inflation figures. Policies are
unlikely to change in the near term. There have been some gradual signs of
recovery in the economy, but the biggest positive continues to be the strength
of the oil price. Our holding in CANTV underperformed during the month, down
nearly 8% in USD.
NET ASSET VALUE
Fully diluted
31/07/00 30/06/00 31/07/00 30/06/00
96.9p 98.9p 97.5p 99.1p
MID-MARKET SHARE PRICE 31/07/00 30/06/00
Ordinary Shares 79.75p 77.25p
Warrants 22.00p 22.25p
Market exposure
31/07/00 30/06/00
EQUITIES
Argentina 1.4 1.4
Brazil 47.6 46.3
Chile 9.9 10.5
Colombia 0.4 0.4
Mexico 36.4 36.4
Peru 1.3 1.4
Venezuela 1.5 1.6
TOTAL PORTFOLIO 98.5 98.0
Net Current Assets 1.5 2.0
------ -------
TOTAL 100.0 100.0
------ -------
Based on total assets less current liabilities of £51.6 million (£52.7
million).
GEARING
Borrowings and Gearing at 31/07/00 30/06/00
£000's £000's
NIL NIL
==== ====
LARGEST HOLDINGS (market value £45.1 million equal to 88.6% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 7,273 14.3
Tele Norte Leste Brazil 3,361 6.6
Petrobras Brazil 2,583 5.1
Unibanco Brazil 2,499 4.9
Banco Itau Brazil 2,414 4.8
Vale do Rio Doce Brazil 2,339 4.6
Brasil Telecom Brazil 2,173 4.3
Gerdau Brazil 2,100 4.1
Femsa Mexico 2,046 4.0
Brahma Brazil 2,035 4.0
Telecom de Chile Chile 1,663 3.3
Grupo Televisa Mexico 1,566 3.1
Telenordeste Celular Brazil 1,496 2.9
Banamex Mexico 1,379 2.7
Grupo Modelo Mexico 1,291 2.5
Cemex Mexico 1,072 2.1
Soriana Mexico 1,007 2.0
Embratel Brazil 1,005 2.0
Telesp Celular Brazil 944 1.9
Kimberly-Clark Mexico 923 1.8
Electrobras Brazil 840 1.7
Enersis Chile 779 1.5
Sider Nacional Brazil 771 1.5
CANTV Venezuela 769 1.5
PC Holdings Argentina 717 1.4
FINANCIAL CALENDAR
Half year 31 August 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 Deutsche 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 Deutsche Latin American Companies Trust PLC and approved by Deutsche
Investment Trust Managers Limited, regulated by the Investment Management
Regulatory Organisation and manager of Deutsche 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 Deutsche 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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