Monthly Report-September 1999
MORGAN GRENFELL LATIN AMERICAN COMPANIES TRUST PLC
11 October 1999
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Morgan Grenfell Latin American Companies Trust
REPORT FOR THE MONTH OF SEPTEMBER 1999
SUMMARY
In sterling value the MSCI Latin American Free Index fell just 1.1% during
September although there was divergence between countries with Brazil rising
3.6% and Mexico falling by a similar amount. With little new money coming
into the region this divergence can be attributed to a trend amongst several
strategists to recommend a shift from outperforming Mexico in anticipation of
improving fundamentals in Brazil. Argentina was little changed during the
month.
On the last day of the month the Brazilian Supreme Court decided that much of
the Government's Social Security amendments was unconstitutional which is a
set-back for the reform process and this resulted in a weaker trend in the
currency and stock market, and some egg on the faces of a number of
strategists.
During the month we slightly underperformed the index with a fall of 2.2%;
although we outperformed the Mexican and Argentine indices we lagged in Brazil
and our overweight in Mexico also contributed to underperformance. Our share
price fell to 54p from 56.5p, a decline of 4.4% as the discount widened
marginally.
BRAZIL
The set-back in the Supreme Court will make little difference to the near-term
outlook. Brazil will meet the requirements of the IMF this year but it does
serve to remind investors that the fiscal situation is still fragile. So far
we have seen no improvement in the monthly trade figures and without
significant capital inflows next year we still see a potential external
funding gap. At this stage this is no more than a concern; we hope that
exports will now begin to improve and that imports will slow, particularly
with the recent bout of weakness in the currency which has fallen to the 1.95
level.
We are also concerned that the market may be too optimistic about growth
prospects; we believe that the economy has troughed but we also think that
recent utility tariff increases, the latest currency fall and continuing high
unemployment will keep consumption in check.
During the month we made some changes to the portfolio, reducing our exposure
to the banks where we have been overweight and also cutting back on the
utility sector adding some of the proceeds to existing holdings such as Brahma
and also adding to some of the telephone companies which have underperformed
during the quarter. We cut back our exposure marginally and now have just a
modest overweight in Brazil.
MEXICO
We remain committed to our overweight in Mexico and were not persuaded by the
strategists who were arguing in favour of Brazil. Political noise may
unsettle the market from time to time in the run up to next year's election
but we are optimistic about the strong economic background and anticipate a
calm outcome to the election. The economy is benefiting from clear signs of
improving growth with second quarter GDP growth of 3.2%, up from 1.9% in the
first quarter. Inflation is trending down and although the currency remains
firm the strong oil price has helped keep the monthly trade deficit within
reasonable bounds. Imports are dominated by primary and intermediate goods
and consumer goods have fallen. Export growth remains strong. Unless there
is some unexpected upset in the election process we are convinced that the
strong economic background will translate into a renewal of stock market
gains. We are less concerned than some about tightening in the USA since we
are expecting only a modest slow-down in growth there. We made no changes to
our holdings during the month.
ARGENTINA
Looking behind the fact that the market was little changed during the month
reveals that the relatively strong rally which started in August and continued
during the first half of September has finally run out of steam and the market
was falling by month-end. We think that although the market had become oversold
and a rally was not too surprising it is not justified by the rather stark
outlook for Argentina which is caught with an uncompetitive currency and a
significant current account deficit whilst in a recession. It is hard to see how
growth can recover strongly without pushing this deficit towards unsustainable
levels since we can not be optimistic about export potential. We are therefore
comfortable with our much reduced exposure and made no change during the month.
CHILE
We mentioned last month that we have become more constructive towards this
market and the reasons for this renewed optimism. In early September Chile
finally abandoned its currency bands and allowed the peso to float freely.
This was a well timed move and the currency remained stable, however the
market fell 6% during the month and we used this as an opportunity to buy a
new position in Endesa Chile. We hope to add further to our Chilean holdings
as opportunities arise.
ANDEAN MARKETS
Venezuela posted a strong rise during the month increasing 33.4% but this
brings the market almost back to all square on the quarter, not quite
recovering what was lost in July and August. The recovery is due to a calmer
political backdrop and the strong oil price but we remain on the sidelines
since we are uncomfortable with the tariff and regulatory framework for the
leading market stocks. Colombia fell less than in recent months, down 3.2%
but is now down over 30% since the start of the year, the only Latin American
market to fall this year due to the continuing severe recession and faltering
peace process. The recent elimination of the peso's trading bands, letting
the currency float freely and the announcement of an IMF agreement and a
$6.9bn package hopefully will mark the turning point although recovery still
seems a long way off and investors are faced with a market with very low
levels of liquidity. We remain constructive towards Peru where we are
overweight. The market performed relatively well in September with a gain of
2.7% driven mostly by local investors. We made no changes to our investments
during the month.
NET ASSET VALUE
Fully diluted
30/09/99 31/08/99 30/09/99 31/08/99
70.4p 72.0p 75.5p 76.8p
MID-MARKET SHARE PRICE 30/09/99 31/08/99
Ordinary Shares 54.00p 56.50p
Warrants 18.25p 16.50p
Market exposure
30/09/99 31/08/99
EQUITIES
Argentina 6.5 6.1
Brazil 31.5 31.1
Chile 10.0 9.6
Colombia 0.7 0.7
Mexico 44.3 44.8
Peru 4.3 4.3
Other 1.3 1.5
TOTAL PORTFOLIO 98.6 98.1
Net Current Assets 1.4 1.9
------- -------
TOTAL 100.0 100.0
------- -------
Based on total assets less current liabilities of £43.6 million (£44.6
million).
GEARING
Borrowings and Gearing at 30/09/99 31/08/99
£000's £000's
NIL NIL
==== ====
LARGEST HOLDINGS (market value £35.0 million equal to 81.5% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 5,148 12.0
Tele Norte Leste Brazil 1,995 4.6
Banco de Galicia Argentina 1,896 4.4
Vale do Rio Doce Brazil 1,872 4.4
Grupo Televisa Mexico 1,795 4.2
Telesp Brazil 1,728 4.0
Tele Centro Sul Brazil 1,523 3.5
Grupo Modelo Mexico 1,470 3.4
Cemex Mexico 1,357 3.2
Alfa Mexico 1,326 3.1
Soriana Mexico 1,303 3.0
Brahma Brazil 1,284 3.0
Petrobras Brazil 1,284 3.0
Banco Itau Brazil 1,208 2.8
Desc Mexico 1,117 2.6
Femsa Mexico 1,017 2.4
Telecom de Chile Chile 987 2.3
Cementos Lima Peru 937 2.2
Perez Companc Argentina 927 2.2
Quinenco Chile 922 2.2
Kimberly-Clark Mexico 922 2.1
Gissa Mexico 825 1.9
Gerdau Brazil 745 1.7
Grupo Carso Mexico 725 1.7
ICA 5% Conv. 15/3/04 Mexico 692 1.6
Financial Calendar
Interim report posted 4 November 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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