Report for November 2000
Deutsche Latin American Cos Tst PLC
14 December 2000
REPORT FOR THE MONTH OF NOVEMBER 2000
SUMMARY
November showed another big drop in Latin American markets; the MSCI Latin
America Free Index fell by 7% in sterling terms, down over 20% year to date.
Global uncertainties over a slowdown in company earnings, the outcome of the
US presidential elections, and still high energy prices, were compounded by
concerns over the situation in Argentina and a liquidity crisis in Turkey.
Our largest markets, Brazil and Mexico, led the decline, down 9.1% and 8.0%
respectively in sterling terms, with index-heavy telecoms and media stocks
falling hardest in line with those sectors' performance in world markets.
As a result of our geared position in these markets and our relatively high
level of telecoms exposure, our NAV fell by 9.8%, underperforming the index.
Our share price saw much less of a move, falling by only 2.9% as the discount
tightened to 14.3% in line with a trend seen throughout the Emerging Markets
investment trust sector. During the month we bought back an additional
1,080,000 shares drawing down further on our loan facility, so that at month
end we were 9.3% geared.
Since the month end, however, we have seen more encouraging developments which
include an easing of concerns over Argentina and Turkey, a drop in oil prices
and indications of interest rate cuts in the US, which have allowed Latin
American markets, particularly Brazil, to begin to stage a recovery. If these
factors remain in place we would expect a sustained improvement in valuations
from the lows of recent weeks.
BRAZIL
The Brazilian market was the region's weakest performer in November, down 9.1%
in sterling terms, as the poor sentiment over Argentina and high oil prices
led to concerns that interest rate cuts may be delayed, holding back economic
growth next year. An announcement that the minimum wage would rise by 19% to
R180/month with effect from April 2001 also affected the market.
Despite the poor sentiment, we had several positive pieces of news during the
month. BSCH paid US$3.5bn for a 30% stake in Sao Paulo state bank Banespa,
beating off much lower bids from Unibanco and Bradesco. With this acquisition
BSCH becomes the third largest private sector bank in Brazil, showing its
determination to increase in scale in order to take advantage of the rapidly
growing banking market. Shares of the major Brazilian banks rallied strongly
on relief that they had not overpaid for Banespa and a perception that BSCH
would not be a strong competitor in the near term. On the day the proceeds
were received, the Brazilian Central Bank actually took action to avoid an
appreciation of the currency and therefore potential further erosion in the
trade balance.
GDP growth was announced to have been 4.5% in Q3, led by the industrial
sector. Despite lower forecasts for global growth, Central Bank head Arminio
Fraga is still forecasting growth of 4.5% for next year. This growth combined
with fiscal discipline is allowing the primary surplus target to be easily
met.
Inflation is still subdued, with recent fuel price increases offset by food
price deflation after a good harvest. IPCA inflation for the year to October
was 6.4%, comfortably within the government's target range of 6-8%. Arminio
Fraga recently reiterated his 4% inflation target for next year despite the
above-inflation rise in the minimum wage: we are comfortable with this
forecast due to the substantial excess capacity in the economy and the labour
market. The recent steep drop in the oil price has led to expectations of a
resumption of the interest rate cutting cycle, possibly before year-end.
The only obvious weakness today is the deteriorating trade deficit, due
largely to the rise in oil imports and surging imports of capital and
intermediate goods. We take this a sign of domestic recovery and are not
overly concerned, particularly given the strong inflows of FDI.
During the month the main underperformers were telecoms and media stocks.
Cyclical companies such as steel makers Gerdau and Usiminas and pulp and paper
makers VCP and Aracruz sold off on concerns over a global hard landing.
Shares in Banespa rebounded after the sale of a controlling stake to BSCH,
although minority shareholders in the former will be unlikely to receive
anything like the premium achieved by the government. We suffered from the
sell-off in telecoms and steel and the weakness of Unibanco. We reduced our
weighting in cellular telecoms early in the month with the sale of
Telenordeste Celular and also sold down Eletrobras. We remain confident that
our Brazil overweight is justified from both a top down and a bottom up basis,
with earnings growth supportive of valuations.
MEXICO
Mexico fell by 8% during November in sterling terms. As in Brazil, the
weakness in the Mexican market can largely be attributed to global concerns as
well as to delays in the appointments to President Fox's cabinet. In the end,
the new team of Francisco Gil Diaz as Finance Minster and Luis Ernesto Derbez
as Economy Minister, together with other key appointments were generally well
received by the markets. But it was concern over a possible hard landing in
the US and fears of higher inflation in Mexico that caused short term interest
rates to rise to over 9% in real terms and sent media, telecoms and cyclical
stocks down by over 10% in dollars.
There has so far been little sign of a real deceleration in growth in Mexico,
despite the slowdown visible in its northern neighbour. Q300 GDP grew by 7%,
still robust although below Q2's figure of 7.6%. Inflation was 0.86% in
November, higher than 0.69% in October and running at 8.9% year on year.
Companies are reporting significant wage pressures and difficulties in
recruiting and retaining staff. Consumption is strong and this is fuelling the
trade deficit. The current strength of the oil price has supported the
currency and masked much of the deterioration in trade; however we remain
concerned that Mexico is heavily exposed to a drop in US demand and a fall in
oil prices. We also feel that Mexican earnings growth has probably peaked.
The only stocks showing positive returns in November were those with
relatively poor liquidity. Media, telecoms and cyclical stocks were the worst
performers, along with retailers. We made no changes to our portfolio during
the month and remain neutral in the market.
ARGENTINA
The Argentine market was weak in November, down 7.3% in sterling terms.
Expectations of an IMF package to secure next year's funding requirement kept
the market volatile. The main details of the IMF plan seem to be the
following: a short term fiscal easing, accompanied by a 5- year freeze on
provincial spending which seeks to make the provinces more fiscally
responsible, and reforms to the pension and healthcare system, to achieve a
longer term tightening. The Ministry of Economy has recognised that the
fiscal deficits for 2000 and 2001 will be higher in absolute terms and instead
of attempting an annual reduction, the deficit will now be kept at a level of
around 2.2% of GDP to 2002. Importantly, for the first time the consolidated
fiscal deficit is being targeted, which includes the provinces in the fiscal
effort. An agreement has already been reached with the provincial governors
to limit spending and the 2001 budget was approved this week in the Lower
House, although disappointingly Congress is relying on the President to take
the blame for public sector salary cuts. Pension and social security reform
is also under discussion. The IMF is set to announce the size of the
financial package, rumoured to contain both upfront cash and contingent credit
lines, over the next few days. This is a high risk strategy as the IMF is
recognised to be the de-facto lender of last resort to Argentina by
underwriting the revised fiscal targets. However, it seems that the IMF's
involvement has improved the political climate and enabled the passage of key
reforms.
We considered the original economic plan doomed to failure. Fiscal
stimulation of the economy coincident with an economic recovery in Brazil and
Chile and an improvement in some of the terms of trade may have a chance of
success. However, a greater degree of political order is required to encourage
renewed consumer spending and private investment, and we cannot bet on an
improvement in soft commodity prices and/or a weakening in the dollar against
the euro to turn around the balance of payments. We therefore think these
measures are still insufficient to solve the country's long term problems.
The weakest stock in November was Telecom Argentina (down 15% in USD) affected
by both a de-rating in global telecoms stocks as well as by concerns over the
local economy. We sold our holding in energy group Perez Companc during the
month and currently have a zero weighting in the market, preferring to play
any upside through Brazil.
CHILE
The Chilean market outperformed in November, rising by 2% in sterling terms.
This was due to tender offers being launched on several stocks in the utility
sector, as well as to the Chilean market's relatively defensive nature. We
have talked for some of the domestic economy lagging the strength of the
export sector. Q3 GDP growth was 5.8%, still led by exports as domestic
confidence weakened over the quarter. However we have more recently seen the
first signs of improvement in domestic demand, as October showed a rebound in
industrial production and a fall in unemployment. Credit for the improvement
can be given to the Central Bank's rate cut and a recent government package
designed to stimulate domestic demand. Higher oil prices have however led to
rising inflation, with 12-month CPI running at 4.7%, above the Central Bank's
4.5% year end target.
We have remained close to neutral in Chile, where the best performing stocks
in November were utility Gener, for which AES of the US launched a takeover
offer, and Chilectra, in the process of being bought out by its parent
Enersis. Telecoms and retail underperformed. We made no changes to our
portfolio during the month.
ANDEAN MARKETS
The smaller markets performed relatively well in November, mostly due to a
lack of liquidity. Colombia rose by 0.9% in sterling terms, while both
Venezuela and Peru fell by 5.3%. The main event was the resignation of Peru's
President Fujimori while on a trip to Japan, and his replacement by interim
President Valentin Paniagua. Peruvian growth was weak in September and
October, and S&P cut Peru's long-term foreign debt rating to BB- citing the
impact of political uncertainty on foreign investment, financing costs and the
economic reform agenda. New elections are set for July 2001.
Elsewhere, we have seen a continued recovery in Colombia, where Q3 GDP rose by
3% YOY, led by exports and manufacturing. Retail sales grew 5.1% in
September, showing some strength in consumer spending. In Venezuela, the
government announced a further 9% increase in spending for next year,
including a 10% pay increase for government employees, funded by strong oil
revenues. The recent fiscal push has already begun to produce a strong short-
term recovery in activity: Q3 growth was 3.3%, with a strong rise in retail
sales and a fall in unemployment. Inflation is still relatively subdued, at
14.2% YOY in November. We have recently seen a strong 25% rally in shares of
Venezuelan telecoms company CANTV on speculation of a takeover bid. We made
no changes to our portfolio in these markets during the month.
NET ASSET VALUE
Fully diluted
30/11/00 31/10/00 30/11/00 31/10/00
83.2p 92.2p 86.7p 93.7p
MID-MARKET SHARE PRICE 30/11/00 31/10/00
Ordinary Shares 74.25p 76.50p
Warrants 16.75p 18.25p
Market exposure
30/11/00 31/10/00
EQUITIES
Argentina - 1.3
Brazil 49.7 49.0
Chile 13.0 11.7
Colombia 0.5 0.4
Mexico 43.0 41.8
Peru - 0.4
Venezuela 1.4 1.4
TOTAL PORTFOLIO 107.6 106.0
Net Current Assets (7.6) (6.0)
------ --------
TOTAL 100.0 100.0
------ --------
Based on total assets less current liabilities of £41.3
million (£46.8 million).
GEARING
Borrowings and Gearing at 30/11/00 31/10/00
£000's £000's
3,503 3,365
==== ====
9.3% 7.8%
==== ====
LARGEST HOLDINGS (market value £41.0 million equal to 92.3% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 6,746 15.2
Petrobras Brazil 3,640 8.2
Banco Ita£ Brazil 3,056 6.9
Ambev Brazil 2,968 6.7
Tele Norte Leste Brazil 2,702 6.1
Unibanco Brazil 2,056 4.6
Femsa Mexico 1,899 4.3
Telecom de Chile Chile 1,734 3.9
Grupo Modelo Mexico 1,442 3.2
Vale do Rio Doce Brazil 1,371 3.1
Brasil Telecom Brazil 1,360 3.1
Grupo Televisa Mexico 1,356 3.0
Gerdau Brazil 1,333 3.0
Banamex Mexico 1,254 2.8
Enersis Chile 1,007 2.3
Cemex Mexico 931 2.1
Kimberly-Clark de Mexico Mexico 840 1.9
Soriana Mexico 836 1.9
D & S Chile 823 1.8
Wal-Mart de Mexico Mexico 765 1.7
Sider Nacional Brazil 674 1.5
Embratel Brazil 621 1.4
Telesp Celular Brazil 561 1.3
CANTV Venezuela 551 1.2
Corp Geo Mexico 513 1.1
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-uk.com/uk/invest/
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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