Monthly Report - April 2001
Deutsche Latin American Cos Tst PLC
10 May 2001
REPORT FOR THE MONTH OF APRIL 2001
SUMMARY
The month of April saw a more positive tone to Latin American equity markets
after the weakness of February and March. The MSCI Latin American Free Index
rose by 5.1% in sterling terms, led by strong rises in Mexico and Venezuela,
which appreciated by 8.6% and 9.6% respectively. Argentina still cast a
shadow over the Southern Cone but the Brazilian market was able to rise at the
month end after more positive developments in its neighbour, ending the month
up by a modest 3.2%. The weakest market was Peru, which fell 9.6% after
former President Alan Garcia unexpectedly secured a place in the runoff for
June's Presidential elections. Overall the Latin American region outperformed
the broader MSCI Global Emerging Markets Free Index (+4.0% in April) which was
held back by weakness in Asia, but lagged behind the developed markets of MSCI
World (+6.6%) which responded positively to another Fed rate cut.
Our performance was significantly better in April, as our NAV rose by 6.5%,
ahead of the benchmark index due to a strong rally in some of our key
overweight stocks, particularly those in Brazil. Our share price lagged this
improvement, rising by only 2.8% as the discount widened slightly to 18.4%.
Recently returned from a positive and interesting trip to Mexico, where we met
with top management of most of the country's largest companies, we have added
to our Mexican weighting and cut back some of our more significant overweights
in Brazil, in order to reduce exposure to the ongoing volatility there.
However we remain somewhat cautious on committing any additional money to
Mexico given the recent strength of the exchange rate and the significant drop
in local interest rates, such that the equity market may be vulnerable to any
disappointments.
BRAZIL
The MSCI Brazil Free Index rose 3.2% in April. Over the month, the equity
market was weak, with confidence eroded by ongoing domestic political
developments (including a Senate scandal over voting secrecy), turmoil in
neighbouring Argentina and concerns over the inflationary impact of the
weakening currency. This last factor caused the Central Bank to raise
interest rates for a second time this year to 16.25%. Year-to-year inflation
was running at 6.44% at the end of March, above the government's target of
4.5%. The currency has weakened considerably against the dollar, down over 2%
during the month and over 10% over the last three months. We cannot yet
assume that the cycle of interest rate rises has ended, nor what impact the
weaker currency and higher rates will have on company earnings, which is why
we have recently reduced our overweight position. However, we continue to
believe that once the situation stabilises the equity market offers good value
at these levels and that downside should be limited.
We benefited from our significant positions in some of the best-performing
stocks over the month, including Unibanco, Brasil Telecom, Petrobras, and Tele
Norte Leste.
MEXICO
The Mexican stock market performed strongly in April with the MSCI Mexico Free
Index rising by 8.6% in sterling terms, driven by a 2.3% appreciation of the
peso against the dollar over the month (due to strong inflows to the capital
account) and significant rises seen in some of its key stocks, many of which
reported better-than-expected Q1 results. Short term interest rates also
declined over the month from 15% to 13%, as Mexico was seen as somewhat of a
safe haven for investors in the region.
A slowdown is already evident in the manufacturing and export segments of the
economy, caused by growing weakness in demand from the US. Industrial
production fell by 3.7% YOY in February and manufacturers report slowing
orders and plants operating below full capacity. The strength of the peso is
exacerbating the slowdown for exporters, which also continue to suffer from a
tight labour market. The part of the economy driven by domestic demand still
seems relatively robust, although there are signs that consumption is
beginning to moderate. The Fox administration has made progress in passing
the indigenous rights bill and some key bills on financial sector reform and
corporate governance. However, uncertainty still exists as to when the long-
awaited fiscal reform bill will be discussed. If passed, this bill would pave
the way for a formal upgrade of the country's debt rating to investment grade
by S&P, and allow other key reforms to be put forward, including a new
electricity law, which would increase investment in Mexico and enhance the
country's efficiency of production.
As already mentioned, during the month we added to two of our holdings in
Mexico, Walmex and BBVA Bancomer, on increased confidence that the earnings
outlook for those companies was sustainable over the next twelve months. We
also invested in a Mexican builder of low-income homes, Consorcio Ara, after a
series of meetings with management that left us convinced that the company
would benefit from President Fox's ambitious targets for growth for that
industry during his administration. We further reduced our small position in
retailer Soriana due to increased competition in its operating area and a lack
of visibility for any improvement in its earnings outlook. Our holdings in
brewers Modelo and Femsa benefited from good Q1 results, helped by a strong
increase in volumes.
ARGENTINA
The Argentine market fell during April, declining by 3.3% in sterling terms
after a volatile month. New Finance Minister Cavallo began his tenure well,
securing political support for a number of necessary reforms and a more pro-
growth economic package. However, he then began to air his plans to introduce
the Euro into a currency basket with the dollar, thus changing Argentina's
convertibility regime. This created tremendous uncertainty in the market and
the spreads soared on Argentina's external bonds as concerns rose over the
possibility of a default. These fears were increased by a dispute with the
Central Bank over the easing of reserve requirements on deposits. However
some recovery was seen at the end of the month as Cavallo announced more
orthodox measures to trim the budget deficit: higher expenditure cuts, an end
to VAT exemptions and an increase in the rate of the new financial
transactions tax from 0.25% to 0.4%. Rumours of a significant debt swap which
would extend the maturity profile of Argentina's debt and so ease short-term
liquidity pressure also calmed the market. The Central Bank President Pedro
Pou was replaced by Roque Maccarone, the ex-President of Banco de la Nacion,
after congressional censure related to a money laundering scandal.
Our view on Argentina today is as follows. Cavallo seems to have retreated
from his earlier, more radical pro-growth policies and in order to secure IMF
support has announced an orthodox programme of spending cuts and tax rises.
While this combined with the debt exchange is likely to allow Argentina to
weather the storm in the financial markets near-term, it does not look like an
attractive proposition for equity investors. Economic data is already weak,
with industrial production, construction and tax revenues all pointing towards
no recovery so far this year. Receipts from the new financial transactions
tax were below target, which prompted the hike in rates. We believe that
higher tax rates are likely to stall the recovery further, meaning that
corporate earnings will remain subdued for the foreseeable future. This has
lessened our interest in holding any Argentine equities, so that we sold our
small position at the end of the month.
CHILE
The Chilean market rose by 4.4% in sterling terms during April; although the
Chilean peso has been weak due to concerns over the situation in neighbouring
Argentina, where many Chilean companies have substantial investments, that was
offset by the Central Bank's surprise announcement of important capital
markets reforms, including the removal of capital gains tax for foreign
investors. That announcement provoked a strong rally in some of the most
liquid names in the local market, anticipating the entry of foreign investors,
after restrictions on capital inflows were eased. Domestic economic data
though is still far from showing a clear trend of recovery, with unemployment
rising to 8.8% in the period to March. As a result, the Central Bank cut
interest rates still further to 3.75% (real), concerned also that the slowdown
in the global economy would put pressure on demand for Chilean exports.
During the month we added modestly to our position in Chile by buying into
Banco Santander Chile, a highly-profitable domestic banking franchise, on the
feeling that the currency had become oversold and that the low level of
interest rates should begin to have some effect.
ANDEAN MARKETS
Peru was the weakest market in the region during April, pressured by investor
concerns over the re-emergence of ex-President Alan Garcia as a challenger to
Alejandro Toledo in the second round of Presidential elections due in early
June. The outcome of those elections is still highly unpredictable as are the
economic policies to be followed by the winning candidate. Meanwhile economic
data has been weak, with February GDP down 2.5% YOY and full-year estimates
being revised downwards. The Colombian market rose by only 0.8% suffering
from a weak currency and continuing signs that growth has moved into reverse
gear. We have heard that our only holding in Colombia, brewer Bavaria, plans
to buy back up to 25% of its shares in a tender offer this month, which would
effectively deprive the market of its most liquid share. Meanwhile in
Venezuela, CANTV saw a significant rally, leading the whole market up by 9.6%
to make it the best performing index over the month. Relative stability in
oil prices and lower unemployment are positive for Venezuela and point towards
further economic recovery.
NET ASSET VALUE
Fully diluted
30/04/01 31/03/01 30/04/01 31/03/01
85.5p 80.3p 88.5p 84.4p
MID-MARKET SHARE PRICE 30/04/01 31/03/01
Ordinary Shares 72.25p 70.25p
Warrants 19.25p 17.00p
NAV based on total assets less current liabilities of £41.0 million (£38.7
million).
Market exposure
30/04/01 31/03/01
% %
EQUITIES
Argentina - 0.8
Brazil 39.0 41.1
Chile 9.4 10.1
Colombia 0.4 0.4
Mexico 38.7 34.6
Venezuela 1.1 0.9
TOTAL PORTFOLIO 88.6 87.9
Net Current Assets 11.4 12.1
-------- --------
TOTAL 100.0 100.0
-------- --------
Based on total assets of £51.5 million (£49.3 million).
GEARING
Gearing at 30/04/01 31/03/01
25.6% 27.2%
==== ====
LARGEST HOLDINGS (market value £41.4 million equal to 90.7% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 5,465 12.0
Petrobras Brazil 4,159 9.1
Ambev Brazil 3,288 7.2
Banco Itau Brazil 2,851 6.3
Femsa Mexico 2,102 4.6
Banamex Mexico 1,913 4.2
Wal-Mart de Mexico Mexico 1,878 4.1
Unibanco Brazil 1,725 3.8
Sider Nacional Brazil 1,710 3.8
Grupo Modelo Mexico 1,648 3.6
Vale do Rio Doce Brazil 1,586 3.5
America Movil Brazil 1,466 3.2
Eletrobras Brazil 1,345 3.0
G.F BBVA-Bancomer Mexico 1,176 2.6
Tele Norte Leste Brazil 1,152 2.5
Grupo Televisa Mexico 1,124 2.5
Enersis Chile 1,007 2.2
Telecom de Chile Chile 957 2.1
Kimberly-Clark de Mexico Mexico 839 1.8
Cemex Mexico 836 1.8
Gerdau Brazil 798 1.7
D & S Chile 702 1.5
Brasil Telecom Brazil 603 1.3
CANTV Venezuela 544 1.2
Consorcio Ara Mexico 516 1.1
FINANCIAL CALENDAR
Annual General Meeting 29 June 2001
Subscription date for Warrants 30 June 2001
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, low cost ISA and Dividend Reinvestment Scheme (a recently established
scheme through which shareholders, who hold their shares on the Company's main
register, can use their dividends to purchase further shares) contact Mark
Pope on 020-7545-0520, e-mail address: mark.pope@db.com. Further details of
Anglo & Overseas 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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