Monthly Report - July 2001
Deutsche Latin American Cos Tst PLC
13 August 2001
REPORT FOR THE MONTH OF JULY 2001
SUMMARY
July was a nervous month for Latin American equity markets, which were
transfixed by the ongoing crisis in Argentina. The MSCI Latin American Free
Index fell by 7.1% in sterling terms, led by Argentina (down 22.1%). Brazil
was also weak, down 8.8%, mostly due to a further depreciation in the
currency, caused by Argentine concerns. The Chilean peso was also pushed
almost 6% weaker against the dollar due to the country's important trade and
investment links with Argentina. In contrast Mexico was far more stable, as
the slowdown in that economy was seen to be contained. World markets also
suffered a relatively weak July, as a disappointing second quarter earnings
season hit US stocks, Japan slid towards another recession and there was
little relief in sight for the technology sector. The MSCI World Index fell
by 2.7% in sterling over the month, while the Emerging Markets index dropped
by 7.8%, hit particularly by declines in technology-sensitive Taiwan and
further problems in Turkey.
Our NAV fell by 8.4% over the month, behind the index despite our zero weight
in Argentina. The underperformance can be traced to our geared position in a
weak market as well as to our overweight Brazil stance. We raised some cash
at the end of the month in a precautionary move, in anticipation of continuing
near-term volatility and a likely resolution of the crisis in Argentina. Most
of the cash came from the sale of our position in Banacci, where the Citigroup
acquisition was approved earlier than expected, but we also slightly reduced
our overweight in Brazil.
ARGENTINA
We have written extensively on the outlook for Argentina in recent months so
that readers will be familiar with our negative stance. There have been
enormous efforts made both domestically and on the international stage in
order to secure approval for additional spending cuts (the new 'zero deficit
plan') and maintain the confidence of both local depositors and the
international markets. In the past week Brazil has been the beneficiary of
US$15bn of IMF money designed to ring-fence the country from any fallout from
Argentina, while it seemed as if Argentina would not be given any further
monetary assistance beyond the $40bn committed at the end of last year.
However as we write there are strong rumours of an additional $5-10bn for
Argentina from the IMF. This has allowed the Argentine bond and equity
markets to rally somewhat and Brazil to strengthen. However, the next stage
of the story depends on confidence being maintained in the domestic banking
system. Deposit outflows have been significant in recent weeks, which is
starting to put pressure on international reserves: hence the need for
additional IMF funds. Interest rates have stayed high as benchmark bond
spreads widened as far as 1700bp over US treasuries; Moody's again downgraded
its rating on Argentina to Caa1 from B3 with a negative outlook. As we have
said before, high interest rates combined with further spending cuts are
likely to depress earnings even more this year, making the equity market an
unappealing one for foreign investors. We stay zero weighted.
BRAZIL
The more important question is what impact will the situation in Argentina
have on Brazil. We said last month that for us a more positive stance on
Brazil would be conditional on three factors; a resolution in Argentina, a
benign inflation outlook and the impact of the energy crisis being relatively
contained. Continuing volatility in Argentina will prolong Brazilian currency
weakness and keep monetary policy tight. We assume however that an early
resolution is likely and that Brazil has enough international support
(manifested in the $15bn IMF facility) to avoid a payments crisis on its
external debt. The IMF facility has been accompanied by an undertaking to cut
spending and increase the primary fiscal surplus for this year and next.
There have also been encouraging legislative moves to introduce independence
for the Central Bank, which should reassure the markets.
As to inflation, prices have continued to rise, most recently due to hikes in
government administered tariffs: year on year IPCA inflation was 7.3% in June
with a higher figure indicated for the first two weeks in July. The Central
Bank raised the overnight interest rate to 19% on 18 July in order to attempt
to stem inflationary pass-through from the recent currency weakness. However,
we should expect rates to need to move temporarily higher should conditions
deteriorate further in Argentina. It is still too early to draw any real
conclusions about the impact of the energy crisis on the economy or the
effectiveness of rationing, which however seems to be proceeding in line with
or slightly ahead of expectations. However, the negative impact has already
shown through in Brazilian industrial production figures, which slowed sharply
in May and June.
For the moment, we remain modestly overweight Brazil, expecting a re-rating in
the market while alert to indicators of renewed weakness.
MEXICO
Mexico has proved immune to Argentine contagion, with the equity market and
currency remarkably stable in recent weeks. However, it is not immune to a US
slowdown: the economy has clearly decelerated, from 5.1% YOY growth in Q4 2000
to 1.9% in Q1 2001 and below 1% in Q2. There has however been no
deterioration in the external accounts, inflation has fallen further and so
have interest rates. In the last week, the government has announced MXP 6.8bn
of spending cuts in order to meet its 2001 fiscal target. At the same time it
was able to raise $1.5bn in new 30-year paper at only 335bp over US Treasuries
in an issue that highlighted the positive stance of most global investors
towards Mexico and the US convergence story. We remain positive and modestly
overweight the market, with a bias towards adding names that would benefit
from a cyclical recovery in the US.
CHILE
Chile again suffered from significant Argentine-induced currency weakness in
July, when the peso depreciated by 5.7% against the USD. Notwithstanding, we
have begun to see some signs of the long-awaited economic recovery.
Industrial production rose by 6.3% YOY in June, led by the capital goods and
mining sectors. Interest rate cuts have begun to have some impact on
consumers, as retail sales rose by 3.8% in the same period, the strongest
since April 2000. Unemployment has stayed relatively flat at 9.7%, which
should help sustain confidence. Despite the weak outlook for exports to Asia,
and the softness in prices of Chile's main export commodities (copper and
pulp) we believe that the economy is now turning which should help the equity
market. We are close to neutral in Chile, and are beginning to slant our
portfolio towards stocks more likely to benefit from economic recovery.
ANDEAN MARKETS
The smaller Andean markets were relatively defensive in July, with Venezuela
down only 1.6% in sterling terms, and Peru and Colombia declining 4.3% and
4.6% respectively. This was despite continued signs of stress in the
Venezuelan financial system and the admission of significant capital flight,
which has provoked strong language from President Chavez. Venezuela has
revised its official growth forecast down to 4% for 2001 principally due to
the cut in oil production agreed by OPEC. CANTV, our only holding, has
performed relatively well due to good financial results and the expectations
of an imminent takeout. Peru saw the inauguration of Alejandro Toledo as the
new President and appointment of a market-friendly cabinet. However GDP fell
by 1% in Q2, weaker than consensus, highlighting a lack of private sector
investment and spending. Colombia released good inflation results for July
which showed that the Central Bank's 8% target for the year-end had already
been achieved. However, this reflects a continuing economic slowdown:
official growth forecasts have been lowered to 2.4% for 2001 and 4% for 2002.
We are zero weighted in both Peru and Colombia.
NET ASSET VALUE
Fully diluted
31/07/01 30/06/01 31/07/01 30/06/01
82.3p 89.8p 86.0p 92.0p
MID-MARKET SHARE PRICE 31/07/01 30/06/01
Ordinary Shares 68.00p 74.50p
Warrants 17.75p 22.50p
NAV based on total assets less current liabilities of £39.5 million (£43.1
million).
Market exposure
31/07/01 30/06/01
% %
EQUITIES
Brazil 33.2 36.6
Chile 9.8 9.6
Mexico 37.4 41.0
Venezuela 1.1 1.1
TOTAL PORTFOLIO 81.5 88.3
Net Current Assets 18.5 11.7
-------- --------
TOTAL 100.0 100.0
-------- --------
Based on total assets of £50.0 million (£53.8 million).
GEARING
Gearing at 31/07/01 30/06/01
26.6% 24.7%
==== ====
LARGEST HOLDINGS (market value £36.9 million equal to 90.6% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 5,426 13.3
Petrobras Brazil 3,480 8.5
Banco Ita£ Brazil 2,530 6.2
Ambev Brazil 2,431 6.0
Femsa Mexico 2,166 5.3
Wal-Mart de Mexico Mexico 2,009 4.9
America Movil Brazil 1,579 3.9
Cemex Mexico 1,555 3.8
Grupo Modelo Mexico 1,516 3.7
Vale do Rio Doce Brazil 1,516 3.7
G.F BBVA-Bancomer Mexico 1,319 3.2
Eletrobras Centrais Brazil 1,302 3.2
Grupo Televisa Mexico 1,270 3.1
Sider Nacional Brazil 1,109 2.7
Brasil Telecom Brazil 1,001 2.5
Enersis Chile 874 2.2
Telecom de Chile Chile 856 2.1
Tele Norte Leste Brazil 795 2.0
D & S Chile 708 1.7
Kimberly-Clark de Mexico Mexico 672 1.7
Consorcio Ara Mexico 622 1.5
Unibanco Brazil 593 1.5
Gerdau Brazil 581 1.4
CANTV Venezuela 542 1.3
Tele Centro Oeste Brazil 488 1.2
FINANCIAL CALENDAR
Half year 31 August 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
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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