Monthly Report - October 1999
Morgan Grenfell Lat Amer Co Tst PLC
12 November 1999
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Morgan Grenfell Latin American Companies Trust
REPORT FOR THE MONTH OF OCTOBER 1999
SUMMARY
In sterling terms, the month of October produced a rise of 2.63% in the MSCI
Latin America Free Index, reversing the negative trend of the third quarter.
Most of this improvement came in the last two weeks of the month, as better
local news and calmer US markets attracted non-dedicated investors into the
region. The Latin American bond markets have shown evidence of renewed
confidence since September, and equity investors now seem to have begun to
position themselves to benefit from regional recovery in 2000. Mexico and
Brazil were the strongest individual markets, up 12% and 8.6% respectively in
the final fortnight of the month.
October also brought us the end of ten years of Peronist rule in Argentina;
the new President-elect is Fernando De La Rua of the Alliance Party. We
expect economic management to remain broadly unchanged, with many challenges
to be faced by the new administration.
During October our NAV outperformed the index with a rise of 3.13%. This was
largely due to our good weightings in Mexico and Brazil. Although the share
price also slightly outperformed the index with a rise of 2.78%, the discount
widened marginally.
BRAZIL
The Brazilian market's 3.8% rise was led by strong performances in the
telecoms sector, where we are overweight, and in the banks.
We believe that the Brazilian market will need to see better news in three
areas before it can make meaningful progress. These catalysts would be
further structural reform, economic growth and improved trade numbers. We
continue to monitor progress on all three fronts.
We think that the market may be too optimistic about growth prospects in 2000.
Rising inflation combined with falling nominal interest rates has meant that
real interest rates have fallen to a 5 year low of 12%. This may lead to some
pick-up in economic activity but it is likely to be offset by the effect on
consumer demand of the loss of purchasing power caused by inflation. The
recent removal of reserve requirements on time deposits and the cut in
financial taxes are an attempt to encourage lending growth.
Brazil met the IMF target for its primary fiscal surplus for Q3 99. However,
Brady Bond payments and the weaker currency meant that foreign reserves fell
to their lowest level since April, and negotiations took place with the IMF to
lower the reserve floor.
We have maintained our portfolio holdings unchanged in the month. Our overall
position remains slightly overweight, with a bias towards the telecoms sector,
which we believe will benefit from consolidation, and banking, where Q3
results have been strong.
MEXICO
Our continuing overweight in Mexico boosted performance in October as the
market was the strongest in the region following the Q3 sell off. The rally
was led by a small number of stocks, particularly the banks and Telmex where
we have good weightings. The banking sector was driven higher by
restructuring plans put forward by the new deposit guarantee agency (IPAB) as
well as by Banamex's announcement in its Q3 results that 100% of its past due
loans are now covered by reserves. This is a watershed for an industry that
has struggled to recover from the impact of the 1994 devaluation. Telmex has
done well since its announcement of a joint venture with Microsoft to develop
a Spanish language internet services provider.
The result of the ruling PRI's first ever primary election to select the next
Presidential candidate has come through since the month end. The favourite
Francisco Labastida has emerged as the winner with a huge majority. His
defeated rival, Roberto Madrazo, has announced he will remain within the PRI.
We think that this further progress towards real democracy is extremely
positive for Mexico going into the next presidential election.
The Q3 earnings reporting season was strong overall in Mexico. We made no
changes to our portfolio during the month.
ARGENTINA
The Argentine market benefited from a return of confidence leading up to the
Presidential election that gave victory to Fernando de la Rua of the Alliance
Party with more than 45% of the vote. He is likely to continue with the
orthodox economic policies of the outgoing administration. In particular, the
new finance minister will need to prepare a fiscal austerity package for 2000
in line with IMF requirements. Despite the better industrial production
numbers that have come through recently, an austere budget and the
uncompetitive currency are likely to mean that any economic recovery in 2000
will be subdued.
We maintain our underweight stance in Argentina.
CHILE
Chile had a weak month in October despite GDP growth and export activity
showing some positive signs. The weakness of the stock market was mainly due
to a sharp sell off in telecoms major CTC, which is owned by Telefonica de
Espana. Investors have been concerned about Telefonica's objective of
removing certain high growth sectors (such as data and internet services) from
its regional businesses and incorporating them into a separate company,
without compensating minorities for the corresponding reduction in value of
their holdings.
We are still underweight in Chile but feel increasingly positive about the
market. An improvement in export demand in the commodities sector and real
interest rates of only 5% have set the stage for a pick-up in growth. There
have also been strong rumours since the peso was floated last month that the
remaining restrictions on foreign capital investment will be lifted. We would
regard this as extremely positive news for the market which has suffered from
a lack of interest from foreign investors.
We will be travelling to Chile in the next few weeks where we hope to identify
stocks which will benefit from the expected economic recovery in order to add
them to our portfolio.
ANDEAN MARKETS
These markets were weak overall in October, with Peru and Venezuela both
falling by around 5%. They have not yet benefited from renewed foreign
investor interest. Peru has been affected by major cabinet changes as well as
by news of a severe deterioration in the fiscal position in the year to August
as the government sought to kick-start the delayed economic recovery. The
market's major stock, Telefonica del Peru, was also weighed down by similar
concerns to those which affected CTC in Chile. We maintain our overweight in
Peru where we think recovery will begin to show through in Q4 earnings. The
Venezuelan bond market has continued to do well in anticipation of a debt swap
but we have not changed our zero weight in Venezuela. The newly-elected
Constitutional Assembly is working on the approval of a draft constitution
submitted by President Chavez and we find little to like as equity investors.
Colombia's economy is still showing few signs of improvement; unemployment
reached 20.7% in Q3 99 and retail sales continue to fall, although the peso
has strengthened slightly since it was floated in September. Peace talks
began again after millions of citizens took to the streets to call for an end
to violence and kidnapping. We remain underweight.
NET ASSET VALUE
Fully diluted
31/10/99 30/09/99 31/10/99 30/09/99
72.6p 70.4p 77.3p 75.5p
MID-MARKET SHARE PRICE 31/10/99 30/09/99
Ordinary Shares 55.50p 54.00p
Warrants 19.75p 18.25p
Market exposure
31/10/99 30/09/99
EQUITIES
Argentina 6.3 6.5
Brazil 32.2 31.5
Chile 9.3 10.0
Colombia 0.7 0.7
Mexico 44.9 44.3
Peru 3.9 4.3
Other 1.3 1.3
TOTAL PORTFOLIO 98.6 98.6
Net Current Assets 1.4 1.4
------ -------
TOTAL 100.0 100.0
------ -------
Based on total assets less current liabilities of £45.0 million (£43.6
million).
GEARING
Borrowings and Gearing at 31/10/99 30/09/99
£000's £000's
NIL NIL
==== ====
LARGEST HOLDINGS (market value £36.2 million equal to 81.7% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 6,201 14.0
Tele Norte Leste Brazil 2,180 4.9
Banco de Galicia Argentina 1,931 4.4
Grupo Televisa Mexico 1,917 4.3
Telesp Brazil 1,783 4.0
Vale do Rio Doce Brazil 1,745 3.9
Tele Centro Sul Brazil 1,646 3.7
Grupo Modelo Mexico 1,417 3.2
Brahma Brazil 1,361 3.1
Banco Itau Brazil 1,336 3.0
Petrobras Brazil 1,334 3.0
Cemex Mexico 1,280 2.9
Soriana Mexico 1,205 2.7
Alfa Mexico 1,205 2.7
Femsa Mexico 1,070 2.4
Desc Mexico 1,061 2.4
Perez Companc Argentina 926 2.1
Telecom de Chile Chile 919 2.1
Cementos Lima Peru 883 2.0
Gerdau Brazil 865 2.0
Quinenco Chile 851 1.9
Kimberly-Clark Mexico 838 1.9
Gissa Mexico 792 1.8
Banamex Mexico 761 1.7
Grupo Carso Mexico 729 1.6
For further information, contact Rosie Bichard at Deutsche Investment 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
Deutsche Investment 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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