Monthly Report -June 2001
Deutsche Latin American Cos Tst PLC
11 July 2001
REPORT FOR THE MONTH OF JUNE 2001
SUMMARY
Latin American markets had a relatively good June; in a month when developed
markets, particularly Europe and Japan, were weak due to the increasingly
shaky outlook for corporate earnings, the Latin American region outperformed:
MSCI Latin America Free Index fell by just 0.25% in sterling terms against a
fall of 2.3% for MSCI World. The regional index was led by the smaller
markets, as Peru rose by 8.3% following the election of Alejandro Toledo.
Mexico continued to appreciate, up 2.4% over the month, while Argentina and
Chile performed poorly, both down by over 5%; concerns over the sustainability
of Argentina's fixed exchange rate system dominated newsflow and have caused
significant weakness in the Chilean and Brazilian currencies. Brazil raised
interest rates again in response, and has declared its intention to intervene
to support the Real: this allowed an improvement in the performance of its
currency and equity market towards the end of the month. However, events
since then in Argentina, notably weakness in the progress of the coalition's
political agenda, have provoked renewed declines both there and in Brazil. We
believe that until a more permanent settlement is achieved in Argentina we
will be unlikely to see a re-rating for the Brazilian market: however it seems
as if such a move may not be far away.
Our own performance was positive in June as our NAV rose by 0.2%, ahead of the
index. For the second quarter of the calendar year, our NAV was up by 11.9%
against an index rise of 8.2%. However, our share price failed to keep up
with the NAV improvement, falling by 4.2% as the discount widened out to 17%
by the month end.
At our AGM on 29 June shareholders voted by a substantial majority that we
should continue as an investment trust for another year. We are grateful to
our shareholders for their support and look forward to a year in which the
region's markets make more progress based on a resolution of the situation in
Argentina, an improving outlook for global growth and company earnings, and
further progress towards convergence between the US and Mexican economies.
MEXICO
Despite unmistakable signs of a slowing economy, where official growth
estimates have edged down from 4.5% to 2% over the past few months, the
Mexican equity market appreciated by 2.4% in June in sterling terms.
Inflation was lower than expected in June, up only 0.2% for the month or 6.6%
over the twelve month period and therefore on track to meet the government's
target of 6.5% for the year. As a result, interest rates were able to fall
further, and are now at 6% in real terms for the 91 day rate. The trade
deficit has shown a remarkably small deterioration, despite the falloff in
exports to the US manufacturing sector and relatively robust consumer demand.
All eyes now are on the progress of negotiations on the fiscal reform bill.
Corporate news included the announcement of a share buy back by leading bakery
group Bimbo, which provided a major boost to its stock price, and the revision
of earnings guidance for the second quarter and second half of the year by the
major groups. We met with the senior management of Cemex, conglomerate Grupo
Industrial Saltillo and cellular company America Movil in our London offices,
and one of our team is attending a Mexican consumer goods conference this
week. We made no major changes to our portfolio over the month.
BRAZIL
The Brazilian market fell by 0.9% in June, rallying strongly towards the month
end as Central Bank President Arminio Fraga hiked interest rates by 150bp. He
also announced a new policy of intervention in the currency market to support
the weak Real, which had fallen by close to 20% against the dollar since the
start of the year, influenced by spillover fears from Argentina, a
deteriorating trade balance, the negative impact on growth of the electricity
crisis, and political infighting. The currency's weakness had provoked fears
of a pass through to inflation, jeopardising the official target of 4-6% for
the year. So far, recent inflation figures have been relatively benign,
thanks to a decline in food prices, and the evident slowdown in many sectors
of the economy should offset any pressures from tariff increases. However we
cannot predict with any certainty if the electricity rationing programme will
be inflationary nor whether companies will attempt to recover some of their
dollar margins lost through the currency devaluation. As a result it is
difficult to judge if the interest rate cycle has yet peaked. Much of the
market's direction also rests on developments in neighbouring Argentina, where
the political environment has deteriorated since the month end.
In corporate news, steel company CSN announced a further significant dividend
resulting from the divestment of its cross holdings in CVRD, and also
announced the $50m acquisition of a US steel processing facility, Heartland
Steel. Brazilian pulp and paper companies Aracruz and VCP produced the
winning bid for CVRD's subsidiary Cenibra; although its Japanese minority
shareholders may try to block the deal, it indicates a rational approach to
industry consolidation and growth among the leading players which is positive.
Aircraft manufacturer Embraer placed a $750m offering of preference shares
being sold down by its controlling shareholders including the development bank
BNDES. We held meetings with the senior management of iron ore producer CVRD,
bank Unibanco and supermarket group Pao de Acucar in London, as well as
attending a small group lunch with Francisco Gros, head of BNDES, where we
discussed the crisis in the electricity sector and the strength and weaknesses
of Brazil's macro and micro-economic policy in considerable detail. During
the month we further reduced our weighting in Unibanco, which has been a
relatively good performer, and added to our holding in Brazil Telecom. We
also acquired a new holding in Tele Centro-Oeste Celular, a stock which looks
certain to be sold by its controlling shareholder within the ongoing
consolidation of the sector.
ARGENTINA
Argentina again generated the greatest amount of concern over the month,
falling by 5.6% in sterling terms. After the successful US$29.5bn debt
exchange, which we reported on last month, the market initially regained some
stability. However this was lost when Finance Minister Domingo Cavallo
announced the introduction of a dual exchange rate for foreign trade
transactions, effectively giving the export sector the benefit of an ARP1.08
exchange rate against the US dollar. This type of mechanism has rarely been
successful in the past and also penalises imports, which are important in the
cost base of many exporters. We believe that to have the architect of
convertibility effectively admit that there is a problem with the current
exchange rate spells the end for convertibility. The market showed its unease
by pushing spreads on Argentina's debt up above 1000bp over Treasuries, a
level at which this year's growth targets are likely to be difficult to meet.
Domestic data continues to be weak, and further concern was aroused by a row
with the provincial governors over essential spending cuts. We remain zero-
weighted in Argentina and are monitoring developments with particular concern
given their undeniable short-term impact on Brazil.
CHILE
The Chilean market fell by 5.7% in sterling terms during June, as the currency
weakened further. The Chilean peso has been negatively affected by
developments in Argentina, to which it is tied by substantial bilateral
investments. It has also seen the prospects for economic growth weaken this
year as Japan has fallen back into recession and prices for its key export
commodities have softened. Domestic data shows still-rising unemployment
holding back consumer confidence and a lack of private sector investment. In
response the Central Bank has cut rates to a low of 3.5% above inflation.
Recent reforms to capital markets legislation, including the abolition of CGT
for foreigners, produced strong gains for the market year to date and to some
extent June's losses also reflect an element of profit taking. We made no
changes to our Chilean portfolio during the month.
ANDEAN MARKETS
Peru led the region in June with an 8.3% rise in sterling terms following the
election of Alejandro Toledo as President and the appointment of orthodox
economist Pedro Pablo Kuczynski as Minister of Finance. However a severe
earthquake in the south of the country combined with the arrival of Fujimori's
disgraced spy chief Vladimiro Montesinos to stand trial, bringing 30,000
videos recording abuses under the former regime, is likely to create problems
for the new government. GDP fell by 0.4% in May, accumulating a 1.6% drop
over the first five months of the year. We remain on the sidelines until we
see signs of growth returning.
Colombia rose by 4% on signs of political and economic progress including a
US$2.5bn local debt swap. However, growth seems to have slowed significantly
and the country's inflation, running at 7.9% for the twelve months to May, is
up against the 8% year end target. Venezuela fell by 4.7%, led by CANTV on
fading prospects of a tender offer. Inflation, at 12.5% accumulated for the
twelve months to June, is proving stubborn, and official unemployment rose to
14.5% in April. We made no changes to our portfolio over the month.
NET ASSET VALUE
Fully diluted
30/06/01 31/05/01 30/06/01 31/05/0
89.8p 89.6p 92.0p 91.8p
MID-MARKET SHARE PRICE 30/06/01 31/05/01
Ordinary Shares 74.50p 77.75p
Warrants 22.50p 22.25p
NAV based on total assets less current liabilities of £43.1 million (£43.0
million).
Market exposure
30/06/01 31/05/01
% %
EQUITIES
Brazil 36.6 35.2
Chile 9.6 10.4
Mexico 41.0 40.7
Venezuela 1.1 1.1
TOTAL PORTFOLIO 88.3 87.4
Net Current Assets 11.7 12.6
------ ------
TOTAL 100.0 100.0
------ ------
Based on total assets of £53.8 million (£53.6 million).
GEARING
Gearing at 30/06/01 31/05/01
24.7% 24.5%
==== ====
LARGEST HOLDINGS (market value £42.9 million equal to 90.3% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 5,564 11.7
Petrobras Brazil 4,075 8.6
Ambev Brazil 2,962 6.2
Banco Itau Brazil 2,918 6.1
Femsa Mexico 2,397 5.1
Banamex Mexico 2,372 5.0
Wal-Mart de Mexico Mexico 2,139 4.5
America Movil Brazil 1,691 3.6
Vale do Rio Doce Brazil 1,683 3.5
Grupo Modelo Mexico 1,632 3.4
Cemex Mexico 1,528 3.2
G.F BBVA-Bancomer Mexico 1,474 3.1
CSN Brazil 1,367 2.9
Grupo Televisa Mexico 1,317 2.8
Eletrobras Brazil 1,244 2.6
Brasil Telecom Brazil 1,227 2.6
Unibanco Brazil 1,069 2.3
Tele Norte Leste Brazil 1,023 2.2
Telecom de Chile Chile 960 2.0
Enersis Chile 934 2.0
D & S Chile 728 1.5
Kimberly-Clark de Mexico Mexico 684 1.4
Gerdau Brazil 680 1.4
Consorcio Ara Mexico 622 1.3
Embratel Brazil 617 1.3
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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