Report for Month of December 1999
Morgan Grenfell Latin American Companies Trust PLC
12 January 2000
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Morgan Grenfell Latin American Companies Trust
REPORT FOR THE MONTH OF DECEMBER 1999
SUMMARY
Latin American markets experienced another powerful rally in December, adding
to the gains made since mid-October. In sterling terms, the MSCI Latin
American Free Index rose 14.38%, with the rally again led by our largest
markets, Brazil and Mexico (up 24.3% and 12.7% respectively). December's rise
brings the accumulated gains for Latin America in the fourth quarter of the
year to 36.18%.
Latin America echoed much of the technology and internet-related euphoria that
buoyed the developed markets towards the end of the year. Telecoms and media
stocks performed strongly, as did many of the local banks and retailers which
announced internet strategies. We took some profits where we felt price rises
were excessive, but overall we believe the markets still look attractive at
current valuation levels and with the backdrop of much stronger earnings
growth expected for 2000. Trading volumes were well above the average for the
year, despite the fact that most international investors, including ourselves,
had closed their books in mid-December; so that for the last three weeks of
the year trading activity was dominated by local investors.
During December, our NAV rose by 15.55%, comfortably outperforming the index.
More encouragingly, our share price rose by 21.3% as the discount narrowed.
Our outperformance came mostly from good stock selection, particularly in
Brazil; our market positioning was also broadly correct.
BRAZIL
Brazil was again the strongest market in the region in December, as local
investors moved into the equity market in anticipation of lower interest
rates, and international investors bought telecoms and media stocks. Both
fixed and wireless telecoms companies did well, with the biggest rises among
some of the smaller and more illiquid names; nevertheless, most of our blue
chip telecoms holdings were up over 40% for the month. Steep rises in some
second-tier stocks characterised the return of local money to the market, but
there were also big gains in the major banks on anticipation of interest rate
cuts as well as internet expansion plans.
Macroeconomic news was good in December, with Moody's upgrading Brazil's local
currency debt; signs that inflationary pressure was easing; Cardoso's
popularity rising; and industrial production on an improving trend. The Real
strengthened as a result to end the year at R1.81 to the dollar, a 50% year on
year decline but a marked improvement from the level of R2 seen a few months
earlier.
Since the year end we have had confirmation that annual consumer price
inflation was only 8.9% (according to the official IPCA Index). In addition,
December showed Brazil's trade accounts in surplus to the tune of $249m on
improved export volumes, the first positive figure since the devaluation.
We anticipate that a lessening of inflation concerns should allow the Central
Bank to resume its rate-cutting cycle, which in turn should alleviate the
pressure on the fiscal accounts and support the economy's return to growth.
We are now more positive on the outlook for Brazil in 2000 and as a result
will be adding to our existing overweight in the market.
During the month we made no changes to our portfolio.
MEXICO
The Mexican market continued its upward trend in December, with the rally
broadening out from Telmex and the banks into media stocks and specific high-
beta consumption driven stories. Some of these names saw rallies of between
40% and 60%.
Macroeconomic news was positive; inflation figures for the eleven months to
November came in at 11.2%, with full year inflation since confirmed to be only
12.3%, the lowest figure for five years and below the Central Bank's 13%
target. As a result, interest rates continued to decline, with 28-day Cetes
ending the year at 16.3%. A further rally in oil prices and strong foreign
inflows left the year end exchange rate at P9.47, a 4% appreciation over the
year. The government finally passed the budget for 2000, which targets a 1%
fiscal deficit and assumes a $16 oil price. Consumer spending rose strongly
in Q399, up 4% despite a cautious start to the year and major loan recoveries
by the commercial banks. However, consumers remain extremely price-sensitive.
In mid-December we reduced our overweight in media company Televisa, which had
experienced a powerful rally (up 64% in two months) and reinvested the
proceeds in our existing holdings, adding in particular to the banking sector
which we feel has excellent prospects for 2000.
We shall be visiting Mexico later in January in order to update ourselves on
company and macro news and, of course, to select stocks which should benefit
from the improved economic environment we expect for 2000.
ARGENTINA
Argentina underperformed the region in December with only a modest rise of
4.4% in sterling terms. Although there was some optimism following the final
approval of the 2000 budget as well as the announcement of industrial
production figures for November showing a 2.6% increase (the first since
September 1998), we are still cautious over the prospects for the market and
believe there is better value to be found elsewhere in the region. In
particular, Argentina's high external financing requirements makes it
vulnerable to expected rate rises by the US Federal Reserve.
We made no changes to our portfolio during the month.
CHILE
The Chilean market put in a slightly better performance than Argentina, up
7.6% for the month, with stronger rises in individual stocks reflecting the
improved outlook for consumption. Although the first round of the
presidential election produced a virtual dead heat and the second round on
January 16 looks as if it will be equally close, this political uncertainty
does not seem to have been reflected in the economy. GDP growth in October
was +2.4%, above expectations, and the November trade balance showed a higher
than expected surplus. The peso strengthened 3% in the month due to these
positive indicators, to end the year at P530/$1.
ANDEAN MARKETS
The Andean markets performed only weakly in December and have substantially
underperformed the region for the year. Combined average daily trading volume
is still only around $15m-$16m compared with Brazil at $400m and Mexico at
$150-$200m, reflecting a lack of interest on the part of international
investors.
Venezuela's voters gave their overwhelming approval to the new constitution.
The next step in the process is the elections for a new Congress, state
governors and mayors, which will be held in the spring and are expected to
provide another endorsement for President Hugo Chavez. However the timetable
has been delayed due to the recent natural disaster; Venezuela's coastline was
hit by mudslides after torrential rain, causing significant damage and loss of
life just before Christmas. We maintain our zero weight in Venezuela but will
revisit this strategy as we believe the equity market is extremely cheap given
the turnaround in the current and fiscal accounts stimulated by the oil price
rally.
Peru was the weakest market in the region in December, rising only 0.4% in
sterling terms. There are some signs of the long-awaited economic recovery
coming through, and economic management is likely to be more orthodox this
year, in line with the recently signed IMF agreement, despite the possibility
of overspending ahead of the April 2000 presidential election. President
Fujimori has announced his intention to run for a third presidential term,
although this time he is likely to encounter more serious opposition.
Colombia rose only 0.9% in sterling terms during the month, although interest
rates continued to fall and a new $2.7bn 3 year agreement was signed with the
IMF. This requires a reduction in the fiscal deficit from 6.3% in 1999 to
3.6% in 2000, which will require significant structural reforms as well as
major budget cuts. However, the oil price rally has produced a turnaround in
Colombia's current account position.
In December we sold our small holding in Peruvian electricity distributor Luz
del Sur, which was the subject of a tender offer by its controlling
shareholders.
NET ASSET VALUE
Fully diluted
31/12/99 30/11/99 31/12/99 30/11/99
96.6p 83.6p 97.2p 86.4p
MID-MARKET SHARE PRICE 31/12/99 30/11/99
Ordinary Shares 78.25p 64.50p
Warrants 28.75p 22.25p
Market exposure
31/12/99 30/11/99
EQUITIES
Argentina 3.7 4.5
Brazil 36.7 32.5
Chile 9.6 10.0
Colombia 0.7 0.7
Mexico 43.7 46.2
Peru 3.4 3.7
Other 1.0 1.2
TOTAL PORTFOLIO 98.8 98.8
Net Current Assets 1.2 1.2
------ -------
TOTAL 100.0 100.0
------ -------
Based on total assets less current liabilities of £59.9 million (£51.8
million).
GEARING
Borrowings and Gearing at 31/12/99 30/11/99
£000's £000's
NIL NIL
==== ====
LARGEST HOLDINGS (market value £48.7 million equal to 82.3% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 8,306 14.0
Tele Norte Leste Brazil 3,497 5.9
Vale do Rio Doce Brazil 2,679 4.5
Tele Centro Sul Brazil 2,658 4.5
Petrobras Brazil 2,235 3.8
Banco Itau Brazil 2,129 3.6
Grupo Televisa Mexico 2,075 3.5
Telesp Brazil 1,982 3.4
Grupo Modelo Mexico 1,680 2.8
Cemex Mexico 1,649 2.8
Banamex Mexico 1,641 2.8
Brahma Brazil 1,625 2.8
Femsa Mexico 1,588 2.7
Alfa Mexico 1,564 2.6
Soriana Mexico 1,554 2.6
Embratel Brazil 1,488 2.5
Banco de Galicia Argentina 1,421 2.4
Gerdau Brazil 1,343 2.3
Telecom de Chile Chile 1,325 2.2
Quinenco Chile 1,208 2.0
Desc Mexico 1,098 1.9
Kimberly-Clark Mexico 1,063 1.8
Gissa Mexico 992 1.7
Cementos Lima Peru 961 1.6
Grupo Carso Mexico 921 1.6
FINANCIAL CALENDAR
Year End 29 February 2000
For further information, contact Rosie Bichard at Deutsche Investment Trust
Managers Limited on 0207-545-6000.
For additional copies, changes of address or details of our Private Investors'
Plan and low cost ISA contact Mark Pope on 0207-545-0520, e-mail address:
mark.pope@db.com
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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