Monthly Report - July 1999
MORGAN GRENFELL LATIN AMERICA COMPANY TRUST PLC
11 August 1999
REPORT FOR THE MONTH OF JULY 1999
SUMMARY
Latin American markets corrected in July led by a fall of almost 14% in
Argentina and falls of about 9% in Brazil and Mexico. Renewed concerns about
the US interest rate outlook were the primary reason for the correction.
Within the region the local news remained broadly positive with an excellent
second quarter reporting season in Mexico, and further rate declines coupled
with signs of the start of economic recovery in Brazil. Argentina remains
under a cloud.
The regional index fell 10.4% during the month and our NAV underperformed
falling 11.5%. Our share price performed broadly in line, by 11% to close the
month at 58.5p.
Since the month end we have seen further market weakness and, at the time of
writing, the regional index is down a further 5%.
BRAZIL
At the end of the month interest rates were cut further than expected with the
benchmark Selic rate cut by 150 basis points to 19.5% but the Central Bank
changed its downward bias to neutral and clarified that there will be no
further changes until the next scheduled meeting on September 1. It is clear
that the Central Bank has focused on the good inflation data and this signals
the potential for further interest rate cuts later in the year.
There has been increasing comment about the lack of momentum in the
Government's progress on fiscal reform although the cabinet reshuffle during
the month may lead to new initiatives. The market remains sceptical however.
Our view on Brazil, despite a renewal of bearish sentiment currently, remains
constructive; growth should return, trade surpluses will turn positive and the
momentum of reform could turn out to be better than the market currently
anticipates.
During the month, taking advantage of the correction, we added to some of our
Brazilian positions, specifically Brahma, Eletrobras and Petrobras and we made
a new investment in Telesp Celular. We are now marginally overweight in
Brazil.
MEXICO
It has been frustrating to see the correction despite an excellent reporting
season, particularly amongst some of our holdings, and despite the continuing
upward move in the oil price which is a significant windfall for Mexico.
Inflation also now seems to be on a downward trend.
Although Mexico is recording modest monthly trade deficits, exports continue
to grow strongly with imports largely a function of intermediate and capital
goods. Exports and investment remain the principal drivers of growth with
consumption lagging. We expect consumer demand to slowly improve due to the
lower trend in interest rates and strong employment data. The excellent
health of the economy has been recognised by the Moody's rating agency who
upgraded Mexico's foreign currency bonds this week.
The market correction has resulted in even better value and we added to four
positions during the month; Alfa, Cemex, Femsa and Televisa.
ARGENTINA
As discussed last month we have continued to reduce exposure to Argentina not
because we are particularly concerned about the viability of the currency link
but more because the near term economic outlook appears worse than for Mexico
and Brazil and stocks offer less value. Fortunately our sales took place
prior to the sharp correction at the start of the second week of July. We
have retained just two holdings, Banco de Galicia and Perez Companc; both of
these companies have the potential for corporate activity, which is the
principal reason that we continue to hold them.
CHILE
The market has resumed its traditional role of outperforming correcting
regional markets, remaining virtually unchanged during the month. In part
this is because the market lagged on the upside but Chile has also benefited
from a series or interest rate cuts and an improvement in the copper price.
The worst of the recession may now be over but we are expecting only a modest
pace of recovery. Unfortunately the market appears fully valued compared with
other markets in the region and there remains a lack of good investment
opportunities beyond those we already hold. We made no changes to the
portfolio during the month.
SMALLER MARKETS
Even more than Mexico, Venezuela is a major beneficiary of oil price strength
as we have discussed before. President Chavez has received a remarkable
confirmation of his popularity with his party achieving 92% of the seats in
the Constituent Assembly. It now remains to be seen how he will use this
power. There is potential here for us to become more optimistic but for the
time being we remain interested observers with no investments in the country.
CANTV the telephone utility which we sold at the start of the year had its
agreed tariff increase frozen last month and is now attempting to have this
decision overturned. Until investors can feel comfortable that the Government
will not move the goal posts we should remain cautious.
The Colombian stock market remains the worst performing in the region this
year, declining over 27%. The economy remains very weak, falling 5.9% in the
first quarter and the Government have so far been unsuccessful in their peace
process with the guerrilla groups. Colombia has now approached the IMF and if
progress towards a support programme is achieved this may be the first sign of
light at the end of the tunnel. We have very limited exposure to Colombia.
The Peruvian economy, in contrast, is showing clear signs of recovery, with
growth of 4.3% in June slightly below the May rate of 4.9%; however, this
activity is dominated by areas such as fishing and agriculture and is not yet
broadly based. Consumption and investment are still in decline. Our small
overweight remains unchanged.
NET ASSET VALUE
Fully diluted
31/07/99 30/06/99 31/07/99 30/06/99
73.4p 83.0p 77.8p 85.9p
MID-MARKET SHARE PRICE 31/07/99 30/06/99
Ordinary Shares 58.50p 65.75p
Warrants 17.25p 21.25p
Market exposure
31/07/99 30/06/99
EQUITIES
Argentina 5.2 7.6
Brazil 31.4 29.3
Chile 9.9 9.0
Colombia 0.7 0.7
Mexico 44.9 41.7
Peru 5.5 4.9
Other 1.5 1.3
TOTAL PORTFOLIO 99.1 94.5
Net Current Assets 0.9 5.5
------- -------
TOTAL 100.0 100.0
------- -------
Based on total assets less current liabilities of £45.7 million (£51.7
million).
GEARING
Borrowings and Gearing at 31/07/99 30/06/99
£000's £000's
NIL NIL
==== ====
LARGEST HOLDINGS (market value £34.9 million equal to 77.1% of total
portfolio)
% of
£000's portfolio
Telmex 5,546 12.2
Vale do Rio Doce 1,787 3.9
Petrobras 1,769 3.9
Grupo Televisa 1,753 3.9
Grupo Modelo 1,632 3.6
Tele Norte Leste 1,516 3.5
Banco de Galicia 1,505 3.3
Telesp 1,424 3.1
Telecom de Chile 1,417 3.1
Desc 1,399 3.1
Organiz Soriana 1,347 3.0
Cemex 1,233 2.7
Femsa 1,135 2.5
Alfa 1,114 2.5
Unibanco Uniao 1,102 2.4
Brahma 1,067 2.4
Gissa 1,029 2.3
Cemig 1,011 2.2
Kimberly-Clark 943 2.1
Cementos Lima 924 2.0
Quinenco 914 2.0
Perez Companc 880 1.9
Electrobras 865 1.9
ICA 5% Conv. 15/3/04 847 1.9
Gerdau 786 1.7
Financial Calendar
Half year 31 August 1999
For further information, contact Alan Nesbit at Morgan Grenfell Trust
Managers Limited on 0171-545-6000.
For additional copies, changes of address or details of our Private
Investors' Plan contact Mark Pope on 0171-545-0520, e-mail address:
mark.pope@db.com
Issued by Morgan Grenfell Latin American Companies Trust PLC and approved by
Morgan Grenfell 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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