Monthly Report - May 2001
Deutsche Latin American Cos Tst PLC
12 June 2001
REPORT FOR THE MONTH OF MAY 2001
SUMMARY
May was another positive month for Latin American equity markets. The MSCI
Latin American Free Index rose by 3.3% in sterling terms, with Mexico and
Chile the strongest of the major markets, up 8.7% and 8% respectively. Brazil
was weak, falling by 4.7%, hit by a worsening energy crisis and political
bickering, while Argentina also underperformed in the run up to its major debt
exchange. Overall the Latin American region remained the strongest performer
among emerging markets, with the MSCI Global Emerging Markets Free Index up by
1.6% over the month; the developed markets of MSCI World fell by 0.8% in May.
Year to date, MSCI Latin America has risen 9.9% in sterling, Emerging Markets
Free by 4.1% and MSCI World has fallen 3.5%.
Our own performance was good in May, with our NAV rising by 4.9%, well ahead
of the index, and our share price up by 7.6% as the discount narrowed to 15.3%
at the month end. Our recent move to increase our Mexico weightings served us
well, with strong rises seen in many key stocks in that market particularly
after the surprise announcement by Citigroup of its US$12.5bn acquisition of
Grupo Financiero Banamex-Accival, Mexico's leading banking group. We see the
acquisition as a clear positive for Mexico and a further step along the road
to economic convergence with its northern neighbour. The last few weeks also
witnessed the announcement of a tender offer by Portugal Telecom for the
remaining shares in its Brazilian subsidiary, Telesp Celular, whose market
value has fallen to a third of what it was immediately after the Telebras
privatisation in 1998. Corporate activity provides fundamental support for
current market valuation levels, and while family ownership of many Latin
American companies means that change is unlikely to happen overnight,
international bidders with access to capital at much lower cost will continue
to make acquisitions in the region where these are seen as earnings-accretive
and strategically attractive.
BRAZIL
May was not a good month for Brazil. The Brazilian market fell by 4.7% in
sterling terms, and the currency depreciated by nearly 8% against the dollar.
The factors behind the fall were various, but chief among them was the growing
realisation that the current energy crisis was serious and would require tough
measures, which will lead to much slower growth this year. The government has
announced rationing plans designed to reduce electricity consumption by 20%.
So far the rationing plan has focused on the more developed south-east of
Brazil but there are already suggestions that it will be extended into other
areas. The impact that rationing will have on GDP growth is uncertain but
forecasts are for a reduction of between 1% and 2% to previous expectations of
4% growth for this year. This compares with the Q1 GDP growth figure of 3.8%
driven by industrial output. Concern over this slowdown and the government's
handling of the crisis, alongside a corruption scandal in Congress, forced the
currency lower. In response, interest rates were raised again to 16.75% in an
effort to contain the inflationary pressure from the weaker Real.
The worst performing stocks over the month were those in the electricity
sector and in energy-intensive industries such as steelmaking. The best
performers were exporters including pulp producer Aracruz, seen as a hedge
against a weak Real, and cellular telecom stocks which rallied on the news of
the Telesp Celular tender offer, and on resulting speculation of further
consolidation among the sector's many operating companies.
Towards the end of the month, we added modestly to our holdings in the
electricity sector after steep falls. We believe that the news on the energy
crisis is already priced into the Brazilian market, that the first indications
show that the inflationary impact should be contained, that the likelihood is
that further interest rate rises will be modest, and that the successful debt
swap in Argentina should allow concerns there to subside for several months.
As a result, we feel that the Brazilian market is looking increasingly
attractive, and while uncertainty and volatility will persist, opportunities
certainly exist for us to increase our weighting in selected stocks.
MEXICO
The Mexican market did well again in May, rising by 8.7% in sterling terms,
led by shares in the financial sector after Citigroup's $12.5bn bid for
Banamex was announced. Citigroup will pay half in cash and half in shares to
acquire 100% of Banamex and subsequently plans to list its own shares in the
Mexican market. The deal sets a number of precedents: a foreign group will
acquire full control of a Mexican bank for the first time; minority
shareholders will receive the same price as that given to Banamex's
controlling shareholders, two of whom will take up seats on the Citibank
board; and despite the 40% premium offered, the deal is expected to be
earnings accretive to Citi in the first year, given Banamex's already good
level of profitability and the opportunities afforded by the combined group's
leading market share. The Mexican immigrant population in the USA is a clear
target for the bank as well as the underdeveloped banking market in Mexico.
Following the announcement of the deal, the equity market reacted strongly to
the perception that this significant amount of new foreign investment would
further strengthen the banking sector and was a further step along the road to
investment grade status for Mexico, implying lower interest rates and eventual
convergence with the US economy. In response, the Central Bank moved to loosen
monetary policy through the corto mechanism, recognising that the slowing
economy and stronger peso had cooled inflationary pressures. Short term
interest rates have now fallen to 10% in nominal terms with inflation of 5.4%.
The trade picture in Mexico is still worsening, as weak industrial production
and exports coincide with still-high levels of consumer spending, despite a
sharp slowdown in GDP growth (+1.9% in Q1). There has also been a general
recognition that the long-awaited fiscal reform bill will not now be debated
until September. However, Mexico's favourable fundamentals, in particular the
continuing flows of foreign investment and the likelihood of further falls in
interest rates mean that the stock market should continue to do well.
CHILE
The Chilean market also outperformed in May, up by 8% in sterling terms. This
rally was led by local shares as capital gains tax for foreigners was removed,
the last step in fully opening the local market to foreign investors. The
market was also pushed higher by corporate activity as a bid was made for
pharmaceutical company LabChile by Ivax of the US. We participated through
our local fund in a placing of shares in telecoms company Entel by the Luksic
Group. However, macro data in Chile has remained relatively weak, with the
March GDP proxy showing only 2.4% growth yoy, and unemployment rising to 9% in
April, although this has allowed inflation to remain subdued despite currency
weakness. We expect that lower interest rates should start to produce higher
growth figures in a few months' time.
ARGENTINA
The Argentine market, where we are zero-weighted, rose by only 1.8% in May
amid nervousness ahead of a planned jumbo debt exchange. In the end, $29.5bn
of bonds were exchanged for longer-dated issues yielding on average 15.4%.
The success of the swap has been greeted as a short-term positive by the
markets and allowed a brief rally in the country's bonds and some
stabilisation in the Brazilian currency. However, now the country's short-
term liquidity issue has been solved, attention must turn back to the original
problem of growth. Macro figures have been mixed, with better data emerging
towards the end of the month providing some grounds for optimism. As we said
last month, the market still does not look like an attractive proposition for
equity investors.
ANDEAN MARKETS
The Peruvian market had a good month, rising by 7.7% ahead of the 3 June
presidential election in which Alejandro Toledo narrowly secured victory over
former President Alan Garcia. There is, however, still significant
uncertainty over the direction in which the new President will take Peru and
the support he will have from Congress. Meanwhile macro data remains weak
(March GDP fell by 3.6% yoy) and it will be some time before any recovery can
be expected.
Colombia was the strongest market in the region over the month, rising by
25.2% in sterling thanks to the announcement by its leading company, Bavaria,
of a major stock buyback in which we participated, receiving a modest premium.
Growth slowed in Colombia to 1.75% in the first quarter, due to weaker export
demand and still-high unemployment. Some progress was made on fiscal reform
and a large domestic bond swap was unveiled, which also helped local
sentiment. However, prospects for the market remain poor and we believe that
many foreign investors like ourselves will have taken the opportunity of the
Bavaria tender offer to exit the stock and the market's liquidity problems.
Venezuela rose by 3.9%, led by CANTV on further bid speculation as AES-owned
local utility EDC announced its intention to sell its stake in CANTV's control
group. We are however far from clear that a tender from the other controlling
shareholders would include minorities. As a result further upside is likely
to remain limited.
NET ASSET VALUE
Fully diluted
31/05/01 30/04/01 31/05/01 30/04/01
89.6p 85.5p 91.8p 88.5p
MID-MARKET SHARE PRICE 31/05/01 30/04/01
Ordinary Shares 77.75p 72.25p
Warrants 22.25p 19.25p
NAV based on total assets less current liabilities of £43.0 million (£41.0
million).
Market exposure
31/05/01 30/04/01
% %
EQUITIES
Brazil 35.2 39.0
Chile 10.4 9.4
Colombia - 0.4
Mexico 40.7 38.7
Venezuela 1.1 1.1
TOTAL PORTFOLIO 87.4 88.6
Net Current Assets 12.6 11.4
------ ------
TOTAL 100.0 100.0
------ ------
Based on total assets of £53.6 million (£51.5 million).
GEARING
Gearing at 31/05/01 30/04/01
24.5% 25.6%
==== ====
LARGEST HOLDINGS (market value £42.5 million equal to 90.8% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 5,414 11.6
Petrobras Brazil 4,391 9.4
Ambev Brazil 2,843 6.1
Banamex Mexico 2,685 5.7
Banco Ita£ Brazil 2,672 5.7
Femsa Mexico 2,375 5.1
Wal-Mart de Mexico Mexico 2,071 4.4
Vale do Rio Doce Brazil 1,773 3.8
America Movil Brazil 1,636 3.5
Grupo Modelo Mexico 1,604 3.4
Sider Nacional Brazil 1,481 3.2
Cemex Mexico 1,466 3.1
Grupo Televisa Mexico 1,375 2.9
G.F BBVA-Bancomer Mexico 1,355 2.9
Eletrobras Centrais Brazil 1,168 2.5
Unibanco Brazil 1,144 2.4
Tele Norte Leste Brazil 1,052 2.2
Enersis Chile 1,022 2.2
Telecom de Chile Chile 1,016 2.2
Brasil Telecom Brazil 819 1.7
D & S Chile 773 1.7
Kimberly-Clark de Mexico Mexico 628 1.3
CANTV Venezuela 598 1.3
Consorcio Mexico 597 1.3
Gerdau Brazil 583 1.2
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
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.
Latest directors dealings
- 1 day ago Savannah Energy
- 1 day ago Buccaneer Energy PLC
- 1 day ago Savannah Energy
- 1 day ago Carclo
- 1 day ago Schroder Japan Growth Fund