Monthly Report- February 2001
Deutsche Latin American Cos Tst PLC
12 March 2001
Deutsche Latin American Companies Trust
REPORT FOR THE MONTH OF FEBRUARY 2001
SUMMARY
February was a weak month for Latin American markets as the MSCI Latin America
Free Index fell by 7.9% in sterling terms. The region proved unable to
sustain its January rally, pressured by external factors including weakness in
international technology stocks and fears of contagion from the Turkish
devaluation, as well as by domestic concerns. The weakest regional market was
Argentina, which fell by 17.9%, under pressure after Turkey devalued and local
political tensions worsened; Brazil was also affected by the more negative
mood, falling 9.2% as the Central Bank did not cut interest rates as expected
and trade figures disappointed. Colombia (+3%) and Peru (+1.6%) outperformed
due to an easing of political tensions in both markets.
It was a difficult month for investors in global markets too; the continuing
sell-off in technology shares left NASDAQ down over 20% and sentiment
deteriorated further in Japan, so that the MSCI World Index fell 7.4% in
sterling terms. MSCI EMF was down 6.7%, pressured by the large falls in
Argentina and Turkey although Emerging Asia was relatively stable.
Our NAV fell by 8.7%, underperforming the index due to our geared position in
weak markets. We were hurt by our relative overweight in Brazil, although our
zero weight in Argentina was a positive contributor to performance, as were
recoveries in some of our other stocks such as Femsa. Our share price fell
less steeply, by only 6.8%, as the discount narrowed.
BRAZIL
Brazil retraced its January gains last month, as poor trade figures weakened
the currency by 5% against the US dollar and prevented interest rates from
being cut further. Inflation is still subdued but accelerating economic
growth is fuelling a trade deficit, raising concerns over balance of payments
financing in an environment of slowing global growth. We believe that for
these reasons local interest rates are likely to stay on hold for several
months. Industrial production rose 7.5% YOY in December and auto sales rose
by 17% in February, showing the strength of the economy particularly in
interest-rate sensitive sectors. Apart from concerns over the economy in
neighbouring Argentina, the other factor pressuring the Brazilian market last
month was politics. A dispute within the ruling coalition has worried
investors, concerned by the potential impact on the government's credibility.
We view the political instability as temporary but the trade weakness as of
more concern, particularly in light of the market's expectation of further
interest rate cuts. The Q400 reporting season has been mixed, with
disappointing earnings reports from banks Unibanco and Bradesco offsetting
stronger figures from Tele Norte Leste. We were also pleased to see CSN's
announcement of a special dividend of over US$900m reflecting the
restructuring of its cross--shareholdings with CVRD.
MEXICO
The Mexican index fell by 5.9% in sterling terms over February, driven down by
concerns over weaker US growth and poor corporate earnings releases. With the
publication of disappointing results from Televisa, brewer Femsa, and
steelmaker Hylsamex we have begun to see earnings expectations revised
downwards as we anticipated. The manufacturing side of the economy is
certainly slowing down, as industrial production data has been weak and
unemployment recently showed a small rise. However, still-buoyant consumer
spending fuelled a $1.2bn trade deficit in January as consumer imports rose by
35%. Inflation has been subdued as agricultural prices fell, allowing short-
term interest rates to come down below 16% by the month end from 18% in
January.
At the end of the month we added to our holding in Grupo Televisa which had
fallen by over 20% after a disappointing (and poorly-communicated) earnings
release. The stock has since recovered by around 10%. In other corporate
news Telmex finally span off its mobile unit, America Moviles, into a new
company that includes its growing business interests in Brazil.
ARGENTINA
The Argentine market plunged by nearly 18% in sterling terms in February due
to an ill-starred combination of weak economic data releases, rising political
tension, a money- laundering scandal and concerns over the Turkish
devaluation. Tax revenues are still disappointing, causing a $940m budget
deficit in January, and industrial production has not turned around. Interest
rates rose, reflecting the contagion effect from Turkey, despite a successful
bond swap earlier in the month and the US$39bn support package arranged by the
IMF only months earlier. Since the end of February, in a response to
plummeting confidence at home and abroad, the Finance Minister Jose Luis
Machinea was replaced in his post by respected former Defence Minister Ricardo
Lopez Murphy. The Chicago-trained economist's greatest challenges will be to
improve consumer confidence in order to jump-start growth, and to stimulate
corporate investment. Although we believe that this appointment is a positive
step, we remain underweight Argentina, where we expect the recovery to be
slower than anticipated, the outlook for corporate earnings poor and the
reform agenda to be overshadowed by political risk.
CHILE
Chile fell by 6.4% in sterling terms in February, outperforming the region
after a 25bp cut in interest rates mid-month from the Central Bank. A further
50bp cut since month-end has brought rates down to an exceptionally
stimulative 4%, reflecting the authorities' concern over the poor state of
domestic demand. Unemployment remains at over 8% and growth is disappointing.
There has been talk of a new package of tax cuts to stimulate consumer
spending and encourage corporate investment. Since the latest rate cut the
Chilean peso has fallen a further 5% against the dollar to a record low of
P590. This level has prompted companies to hedge their dollar debt, weakening
the currency still further. Results from telecoms major CTC and Banco Edwards
were again affected by bad debt provisions, reflecting the weakness of the
domestic economy. However, the Luksic group has seen a sudden flurry of
interest from both Anheuser Busch and Heineken who have both accumulated
stakes in its CCU brewing and soft drinks unit. Their involvement signals a
new stage in the consolidation of the brewing industry in Latin America in
response to the competitive threat from Ambev. We made no changes to our
Chilean portfolio during the month.
ANDEAN MARKETS
As previously mentioned, the Andean markets, particularly Peru and Colombia,
outperformed the region in February due to the improvement in the political
climate at a time of rising risks elsewhere. In Peru's forthcoming
Presidential election it seems increasingly likely that there will be a second
round run-off between two more moderate candidates, Alejandro Toledo and
conservative Lourdes Flores, rather than a win by discredited former President
Alan Garcia. However, the economy is still weak and the path to recovery will
be prolonged. Political tensions were eased in Colombia with the resumption
of peace talks with a major guerrilla group. Although the economy is much
stronger than 1999, with industrial production growth of over 10% and a 3%
rise in retail sales year on year in December, there have been recent signs of
a slowdown. Brewer Bavaria finally ended the strike that had caused major
disruption to its production in recent weeks. In Venezuela, where the market
fell by 5.4% in sterling terms, there has been little news now that the recent
frenzy of corporate activity has subsided. Inflation is still contained by
the strength of the currency and non-oil exports have shown some recovery.
However there appears to be growing popular dissatisfaction with the Chavez
government which in turn is causing strains within the coalition. Telecoms
major CANTV reported results that were weaker than anticipated after
significant severance payments related to a corporate restructuring programme.
We believe that the Andean region will continue to be supported by fairly
stable oil and other commodity prices in 2001 but that the lack of real
progress on structural reform, and continuing political instability, will be a
key risk for these markets which already suffer from severely diminished
liquidity.
NET ASSET VALUE
Fully diluted
28/02/01 31/01/01 28/02/01 31/01/01
89.5p 98.0p 91.7p 98.4p
MID-MARKET SHARE PRICE 28/02/01 31/01/01
Ordinary Shares 78.50p 84.25p
Warrants 20.00p 20.75p
NAV based on total assets less current liabilities of £43.2 million (£48.5
million).
Market exposure
28/02/01 31/01/01
EQUITIES
Brazil 43.0 44.0
Chile 10.3 10.1
Colombia 0.4 0.4
Mexico 32.8 32.2
Venezuela 1.4 1.4
TOTAL PORTFOLIO 87.9 88.1
Net Current Assets 12.1 11.9
------ ------
TOTAL 100.0 100.0
------ ------
Based on total assets of £53.6 million (£58.8 million).
GEARING
Gearing at 28/02/01 31/01/01
24.1% 21.2%
==== ====
LARGEST HOLDINGS (market value £43.6 million equal to 92.5% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 4,563 9.7
Petrobras Brazil 3,964 8.4
Ambev Brazil 3,383 7.2
Tele Norte Leste Brazil 3,179 6.7
Banco Itau Brazil 3,112 6.6
America Movil Brazil 2,532 5.4
Unibanco Brazil 2,175 4.6
Sider Nacional Brazil 1,848 3.9
Vale do Rio Doce Brazil 1,736 3.7
Femsa Mexico 1,723 3.7
Telecom de Chile Chile 1,720 3.7
Banamex Mexico 1,639 3.5
Brasil Telecom Brazil 1,601 3.4
Grupo Modelo Mexico 1,497 3.2
Grupo Televisa Mexico 1,419 3.0
Enersis Chile 1,024 2.2
Kimberly-Clark de Mexico Mexico 862 1.8
Wal-Mart de Mexico Mexico 818 1.7
Gerdau Brazil 796 1.7
Cemex Mexico 754 1.6
D & S Chile 753 1.6
CANTV Venezuela 732 1.6
Telesp Celular Brazil 625 1.3
Embratel Brazil 612 1.3
Endesa Chile 489 1.0
FINANCIAL CALENDAR
Preliminary Results Announced 18 April 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 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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