Report for Month of June 2000
Deutsche Latin American Cos Tst PLC
12 July 2000
The Deutsche Latin American Companies Trust supports the AITC its campaign
REPORT FOR THE MONTH OF JUNE 2000
SUMMARY
June saw a sharp rise in the Latin American markets as US data continued to
indicate the potential for a soft landing in that economy. As expected, the
US Fed did not raise rates at its June meeting although it indicated that it
would remain vigilant for signs of inflationary pressure. This calmer
backdrop allowed the regional index (MSCI Latin America Free) to rise by 7.4%
in sterling terms over the month, led by steep gains in Brazil and Mexico,
both up over 10.7%. Brazil was driven by interest rates resuming their
downward path, as we had predicted. Mexico initially lagged Brazil but then
did well in the last week of the month, as election fears abated, the currency
strengthened and investors began to build positions ahead of the July 2 poll.
The startling outcome of the election, which unexpectedly gave PAN
Presidential candidate Vincente Fox a clear margin of victory over the ruling
PRI and a considerable bloc of seats in Congress, caused widespread euphoria
within Mexico and was greeted with resounding approval throughout the
international community. Furthermore, the election was seen to be a fair and
transparent process with a high level of voter participation. After 71 years
of PRI rule, Mexico is now entering a new stage in its history.
Our NAV rose by 10.1% during the month, outperforming the regional index by a
wide margin as our Brazil overweight and good regional stock selection came to
the fore. For the second quarter, our NAV fell by 0.5% against an index fall
of 3.1%, again showing significant relative outperformance despite the fall in
absolute terms. In June our share price performance lagged the NAV rise, up
by only 8.4%, as towards the end of the month the discount widened to over
21.0%. This was principally due to a 4.0% fall in the stock price on the
final day of the month on which we held our AGM: it has since recovered.
At the AGM, our shareholders voted that we should continue as an investment
trust for another twelve months. We are grateful for their support and
undertake to make every effort to improve returns over the coming year. We
should also mention that shareholders voted to change the name of the company
to Deutsche Latin American Companies Trust PLC.
MEXICO
All eyes in the last few days have been on Mexico. The enthusiasm generated
by the unexpected Presidential election victory of Vicente Fox, with a margin
of around 7%, has been spectacular. The transparent and orderly nature of the
process, and the statesmanlike conduct of President Zedillo in conceding the
PRI's defeat have delighted Mexicans and Mexico-watchers alike.
During the period before the election the market made little progress: 28-day
interest rates rose as high as 17% from their low of 12.8% in early April, and
the currency weakened from P9.51 to P10.07 to the US dollar. However, after a
26% fall in the index since March, a perception that concerns were exaggerated
led investors to move back in the final days before the election, bringing a
10% rally. The purchase of 32% of Bancomer by BBV also strengthened the peso,
while the successful earlier placement of the $1.7bn Telmex secondary offering
had removed an overhang from the market. Once the election results were
announced, the currency strengthened further and the market rose sharply.
Interest rates have already fallen back to 14.3%.
We are extremely pleased with the election outcome for Mexico, but following
the sharp rally we would sound a modestly cautious note: the two main factors
affecting Mexico's economic performance over the near to medium term are the
health of the US economy and the strength of the oil price, over neither of
which President Fox will have control. In addition, the defeat of the PRI may
cause some instability within that party which could potentially determine the
efficacy of Fox's policy efforts. Importantly, he has announced his intention
to cooperate with the outgoing government during the transition period before
he takes office in December. On the economic front, Fox has already stated
that it is his priority to reduce the fiscal deficit to 0.5% of GDP by 2001
and to increase FDI from $12bn to $20bn, potentially by allowing private
investment in the electricity and energy sectors. He also intends to submit a
draft 2001 budget to Congress by 15 October.
During the month, the Mexican Central bank tightened monetary policy through
the Corto mechanism as a reaction to strong economic growth and a weakening
peso. Consumer spending grew 9.2% YOY in Q1, with retail sales surging by 11%
in April. We believe that monetary policy is likely to stay tight for the
rest of the year.
The best performing stocks during the month were the blue chip consumer-
sensitive telecoms, beverages, retailers and Banacci. The conglomerates,
particularly Alfa, and miner Grupo Mexico underperformed. During June we sold
down our weightings in Desc and Alfa to neutral; despite considerable
underperformance year to date their poor earnings outlook means that
valuations are no longer compelling and we cannot identify a likely catalyst
which would bring about a re-rating. Those sales took our Mexico weighting
below the benchmark. However, on any weakness we will be looking to add to
stocks with a brighter earnings outlook.
BRAZIL
The Brazilian market rose by 10.7% in sterling terms over the month. The main
event was a larger than expected cut in the benchmark Selic interest rate,
which was reduced by 100bp to 17.5%, with the committee announcing a move to
an easing bias. Rates were cut by another 50bp on Friday 7 July. These moves
are wholly justified given the rapid decline of inflation since the last 25bp
cut in February: we expect the year-end inflation figure to be 5.5% and for
nominal interest rates to end the year at 14.5%. Fiscal results continue to
beat market expectations. Reserve requirements on demand deposits were also
cut from 55% to 45% in a further move by the Central Bank to increase
liquidity and boost economic growth. We are already seeing a cyclical
recovery in demand for durable goods, which should feed through into better
economic growth and more job creation.
We remain strongly positive on Brazil, with an overweight position of over
8.5% against the benchmark. Our favoured sectors continue to be telecoms and
banking. The month's best performers included cellular telecoms, Petrobras
(which is preparing a global offering), utility Eletrobras and aircraft
manufacturer Embraer. Telesp underperformed going into the Telefonica stock
swap. During the month we added to our holdings in cellular company
Telenordeste Celular, which has been a strong performer, and steel company
CSN where the cross-ownership issues with CVRD are close to being resolved.
CHILE
The Chilean market fell by 5.0% in sterling terms during June. The larger
liquid names, including CTC and Enersis, underperformed. This followed a
strong rally in May when capital controls on foreign investment were removed.
In a further measure to boost foreign interest in the local stock market, the
Finance Minister announced that a bill would shortly be presented to Congress
to abolish capital gains tax. The economic recovery continues in Chile: GDP
growth was 6.4% in April. However, inflation remains relatively subdued, at
3.7% for the year to June, with the principal risk coming from the high oil
price. We made no changes to our Chilean portfolio during the month.
ARGENTINA
The Argentine market rose by 4.8% in June, most of which was achieved in the
last few days of the month when news flow turned slightly more positive. The
June tax revenue figure (up 15.4%) lifted the market, as it meant that
Argentina had met the Q2 IMF fiscal target. This improvement was largely due
to advance payments of this year's income tax and the success of a tax
moratorium. The April trade figures showed a strong 14.5% growth in exports
and subdued import growth. However, we still believe that the rest of the
year's targets will be difficult to achieve given weak economic growth and the
effect of further budget cuts. Unemployment has risen to 14.7% against 13.8%
last October. GDP grew by a weaker than expected 0.9% in Q100, although an
improvement from a 0.3% fall in Q499. Construction activity fell 4.7% MOM in
May, a stronger dip than April's 1.7% fall.
We remain underweight in Argentina and sceptical about its economic recovery.
Our only holding, energy conglomerate PC Holdings, outperformed the local
index with a 12% rise in dollar terms in June. Telefonica Argentina fell, hit
by selling pressure following the Telefonica share swap, and Banco de Galicia
continued to suffer the effects of its badly received capital restructuring
proposal.
ANDEAN MARKETS
There was a wide variation in performance between the smaller Andean markets
last month, but they all underperformed the regional index. Colombia fell by
13% in sterling terms as political uncertainty continued, delaying the passage
of important fiscal reforms. Planned privatisations have also been postponed.
However, the economy is showing some signs of recovery with GDP growth rising
2.2% in Q1: in another confidence-boosting measure, the US Senate approved a
$1bn aid package to combat drug trafficking. The Colombian peso has been very
weak, falling by 16% against the US dollar year to date.
Peru rose by 1.5% in sterling terms, as the market recovered from the
controversial May Presidential elections: economic sanctions against Peru have
been ruled out by the Organisation of American States who are instead pursuing
an agenda to strengthen democratic institutions in the country. The economy
grew by 6.6% in May, and by 6.2% over the January to May period, with the
strongest growth shown in fishing, agriculture and manufacturing.
Venezuela fell by 2.7% in June after the buyout of utility EDC by AES was
successfully concluded. The stock has been dropped by the local indices as
trading liquidity has now been dramatically reduced. Presidential,
congressional and gubernational elections, originally scheduled for May 28,
were set for July 30: President Chavez now seems likely to overcome the
challenge from his rival Arias. BSCH announced plans to purchase Banco
Caracas, the country's fourth largest bank, through its Banco de Venezuela
subsidiary, to create Venezuela's largest financial institution.
As for stock returns in these markets, Telefonica del Peru underperformed
(down 22.0% in dollar terms) on selling pressure before the stock swap with
TEF. Credicorp was a relative outperformer in Peru; however our Venezuelan
telecoms holding, CANTV, underperformed. We made no changes to these holdings
during the month.
NET ASSET VALUE
Fully diluted
30/06/00 31/05/00 30/06/00 31/05/00
98.9p 89.8p 99.1p 91.8p
MID-MARKET SHARE PRICE 30/06/00 31/05/00
Ordinary Shares 77.25p 71.25p
Warrants 22.25p 21.75p
Market exposure
30/06/00 31/05/00
EQUITIES
Argentina 1.4 1.4
Brazil 46.3 43.0
Chile 10.5 12.5
Colombia 0.4 0.5
Mexico 36.4 38.0
Peru 1.4 1.7
Venezuela 1.6 1.9
TOTAL PORTFOLIO 98.0 99.0
Net Current Assets 2.0 1.0
------ -------
TOTAL 100.0 100.0
------ -------
Based on total assets less current liabilities of £52.7 million (£48.4
million).
GEARING
Borrowings and Gearing at 30/06/00 31/05/00
£000's £000's
NIL NIL
==== ====
LARGEST HOLDINGS (market value £45.2 million equal to 87.5% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 7,811 15.1
Tele Norte Leste Brazil 3,422 6.6
Petrobras Brazil 2,610 5.1
Vale do Rio Doce Brazil 2,265 4.4
Unibanco Brazil 2,260 4.4
Banco Itau Brazil 2,252 4.4
Brasil Telecom Brazil 2,181 4.2
Telecom de Chile Chile 1,987 3.8
Femsa Mexico 1,955 3.8
Brahma Brazil 1,830 3.6
Telenordeste Brazil 1,620 3.1
Grupo Televisa Mexico 1,425 2.8
Gerdau Brazil 1,377 2.7
Embratel Brazil 1,342 2.6
Telesp Celular Brazil 1,320 2.6
Grupo Modelo Mexico 1,296 2.5
Banamex Mexico 1,253 2.4
Soriana Mexico 1,108 2.1
Cemex Mexico 1,055 2.0
Kimberly-Clark Mexico 868 1.7
C A NAC Telefonos Venezuela 844 1.6
Enersis Chile 790 1.5
Electrobras Brazil 767 1.5
Credicorp Peru 762 1.5
PC Holdings Argentina 753 1.5
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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