Report for December 2000
Deutsche Latin American Cos Tst PLC
19 January 2001
REPORT FOR THE MONTH OF DECEMBER 2000
SUMMARY
Latin American markets were weak again in December, shaken by a further sell-
off in the US stockmarket and increased fears of a global slowdown. The MSCI
Latin American index fell by 0.9% in sterling terms, ending the fourth quarter
down 9.4% and bringing a drop of 11.9% for the year. The weakest major market
was Mexico, which fell by 7.6% as worries grew over the effect of slower US
growth and lower oil prices on the Mexican economy. In contrast the Brazilian
market rose by 7.9% in response to a 75bp cut in local interest rates and
improved sentiment in the local market following the IMF's rescue package for
Argentina.
If we compare Latin America's performance with that of global Emerging
Markets, it outperformed during all of last year. The MSCI Emerging Markets
Free Index fell by 2.9% in December in sterling terms, and ended the quarter
and the year down 14.4% and 26.4% respectively, affected by continued weakness
in Asia. However Latin America underperformed the developed markets of the
MSCI World index, which fell by 7.4% in Q4 and by a similar amount for the
full year.
Our NAV rose by 1.6% in December, outperforming the benchmark index. We
benefited particularly from good stock selection in Brazil, where we maintain
an overweight position. For the calendar year our NAV fell by 12.6%, slightly
below the benchmark fall of 11.9%. Although asset allocation was positive for
the year as was our stock selection in Brazil, we were hurt by the
underperformance of our Mexican holdings relative to the index.
Since the year end Latin American markets have regained some positive
direction following the US Federal Reserve's surprise interest rate cut on 3
January. Over recent months we have seen a decisive shift in the outlook for
the world economy from excessive growth to a significant slowdown. At the
same time, we are expecting interest rates to be cut further in the US and
other major economies in order to avoid the threat of recession. In a world
of slower but still positive growth, with lower energy costs and falling
interest rates, the outlook for Latin America is relatively good, though
countries such as such as Venezuela and Mexico will miss the boost to their
fiscal and trade accounts that this year's oil price windfall gave them.
BRAZIL
The market rose by 7.9% in December, significantly outperforming the regional
index. The most important news in Brazil during the month was a 75bp cut in
overnight rates on 20 December to 15.75%, which was above market expectations.
The Central Bank explained its decision by commenting that domestic inflation
was on a favourable trend and that the external environment had improved.
Standard and Poors upgraded Brazilian sovereign debt to BB- in the first week
of January, vindicating the decision to cut rates in the midst of savage
profit downgrades in the US and weak international stock markets. Since then
we have seen a further 50bp cut in rates to 15.25% on 17 January. Uncertainty
over oil prices means that rate cuts may now pause for a while. The IMF
package has reduced the risk of contagion from Argentina to Brazil and
established a floor with regard to investor and lender expectations.
The Central Bank has revised downwards its growth expectations for next year
but is still talking about GDP growth of 4.5% and inflation of below 4%. More
moderate growth and a weaker oil price should allow the current account
deficit to stabilise. The January to November figure was a deficit of 4.0% of
GDP, although this was more than covered by FDI.
The main corporate news was the sale of steel company CSN's 9% stake in
utility Light for a higher than expected $362m. The proceeds will be applied
to reduce debt. More asset sales should be expected, along with the ongoing
restructuring of the cross-shareholdings between CSN and CVRD. We increased
our holding in CSN in December, as we applaud its strategy of increased focus
on its core steel business and await an extraordinary dividend payment. This
was funded by a reduction in our holding in Gerdau, which is more exposed than
CSN to the weak North American steel market. Meanwhile Unibanco, pushed into
fourth place in the private banking market by BSCH's acquisition of Banespa,
announced the acquisition of a further 50% stake in consumer finance house
Fininvest, which has 3 million lower income clients.
MEXICO
The Mexican market fell heavily in December, down 7.6% on weaker oil prices
and fears of a slowdown in the US hitting demand for Mexican exports. There
is also concern over inflationary pressures. CPI ended the year at 9.0% and
the target for 2001 is 6.5%. To combat inflation, Central Bank governor
Guillermo Ortiz will keep monetary policy tight; 3 month interest rates are
today over 19% in nominal terms. So far there is little sign of a slowdown in
consumption, with retail sales up 10.4% in October. The Mexican peso fell
from P9.4 to P9.6 to the US dollar over the month and has since weakened
further to P9.9. We believe that consensus is still too optimistic over
Mexican earnings growth and the direction of the exchange rate given the
slowdown in US economic activity and the fall in the oil price: the factors
which have driven the strong real appreciation of the peso over the last four
years have reversed.
The other main concern in the market in December was related to the approval
of the 2001 budget, introduced to Congress by the new Finance Minister
Francisco Gil Diaz after the inauguration of President Fox on 1 December. It
assumes a 4.5% growth rate in GDP and a tighter fiscal deficit of 0.6% based
on an oil price of US$18/barrel. The approval of the budget was seen as a key
test of the new government and its ability to push through policy without a
Congressional majority; in the end approval was secured in a relatively
straightforward manner.
Brewer Femsa issued a profits warning, saying that its 12 month consolidated
operating profits would grow only 9-11% due to lower than expected sales at
its beer division. Beer shipments have fallen around 18% YOY partly due to
adverse weather conditions in Northern Mexico, tough comparisons in December
1999, and a major effort to streamline its commercial practices by, for
example, implementing stricter payment terms with suppliers. We believe that
although the stock has been weak short-term, this setback is understandable
when Femsa is undertaking a significant strategic change which will bring
longer-term benefits.
In other corporate news, Telmex announced that the spin-off of its mobile
business America Movil would take place in Q1 2001, and Bank of Montreal
announced that it would sell its 10.5% stake in Grupo Financiero BBVA-Bancomer
over the next two years. Part of this stake will be acquired by the
controlling shareholder, BBVA of Spain.
We made no major changes to our portfolio in December.
ARGENTINA
The Argentine market fell 1.8% in sterling terms during the month. After
weeks of speculation, the size of the 3 year IMF-led emergency credit package
was announced to be US$39.7bn, of which $7bn corresponds to a debt swap to be
arranged in early 2001. As we discussed last month, several of the
preconditions for the IMF money to be released have already been dealt with,
including the passage of the 2001 budget. However, now that the short-term
risk of default has been eliminated, the country's next major challenge is to
promote growth. Q3 GDP figures were announced to have shown no growth at all,
and we do not believe that the package will be enough to provide a substantial
boost towards the 2.5% growth assumed in the 2001 budget. The fiscal program
announced in conjunction with the IMF aid package does acknowledge that
further tightening would be an ineffective strategy under the current
circumstances. However, there is no genuine fiscal activism, simply an
acknowledgement that initial GDP growth assumptions were not realistic, and
that as a result tax collection forecasts were also overestimated. As a
result, and given the absence of discretion on monetary policy, economic
growth continues to rely largely on external factors, such as terms of trade
and sovereign spreads.
We made no changes to our zero weight in Argentina during the month.
CHILE
The Chilean market fell by 5% in December in sterling terms. A number of
economic data releases began to show a more positive trend, namely falling
unemployment, stronger retail sales figures and October GDP growth of 5.8%.
Interest rates have been left unchanged at the current stimulative 5% level;
although core inflation of 3.3% in November was above the government's year
end target, it has already fallen since October and lower oil prices should
further relieve inflationary pressures.
The new tender offer and corporate governance law came into effect. Before
the law's enactment, several large takeovers took place. Conglomerate
Quinenco, controlled by the Luksic Group, took control of Banco de Chile, the
country's fourth largest by assets. Telecom Italia offered $905m to gain
control of Entel from Chilquinta, and the way was cleared for AES to take over
utility Gener.
We made no change to our Chilean holdings during the month.
ANDEAN MARKETS
There was little news from the Andean countries in December. Colombia and
Peru underperformed, down 9.7% and 3.8% respectively in sterling terms, while
Venezuela rose by 5.4% on another wave of takeover speculation.
Inflation is still well under control in Colombia, where CPI is running at
7.98% for the 11 months to November. Third quarter growth was 3.1%, led by
exports, with some concern over signs of a slowdown in Q4. The main measures
of the country's tax reform package were finally approved by Congress; these
are designed to raise $1.5bn in new revenues. GDP growth in Peru was only
0.2% in October after a contraction in construction and fishing. The banking
authorities intervened in several smaller Peruvian banks which were suffering
from a liquidity crisis after a withdrawal of government deposits. Venezuela
has announced that it will depreciate the band governing the Bolivar's
exchange rate against the dollar by 7% next year. Bell South and a Bell
Canada/SBC/Telmex consortium have been awarded licences to operate wireless
local loop telecommunications services in various regions of Venezuela. Food
company Mavesa is in talks with several potential acquirors including the
privately held Polar group.
We made no changes to our portfolio in these markets over the month.
NET ASSET VALUE
Fully diluted
31/12/00 30/11/00 31/12/00 30/11/00
84.5p 83.2p 87.7p 86.7p
MID-MARKET SHARE PRICE 31/12/00 30/11/00
Ordinary Shares 71.25p 74.25p
Warrants 14.75p 16.75p
NAV based on total assets less current liabilities of £41.8 million (£41.3
million).
Market exposure
31/12/00 30/11/00
EQUITIES
Brazil 48.6 42.8
Chile 10.7 11.2
Colombia 0.4 0.5
Mexico 33.9 37.1
Venezuela 1.3 1.1
TOTAL PORTFOLIO 94.9 92.7
Net Current Assets 5.1 7.3
------ --------
TOTAL 100.0 100.0
------ --------
Based on total assets of £47.9 million (£47.9 million).
GEARING
Borrowings and Gearing at 31/12/00 30/11/00
14.7% 16.1%
==== ====
LARGEST HOLDINGS (market value £42.7 million equal to 93.8% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 6,162 13.5
Banco Ita£ Brazil 3,608 7.9
Petrobras Brazil 3,387 7.4
Tele Norte Leste Brazil 3,227 7.1
Ambev Brazil 3,218 7.1
Unibanco Brazil 2,582 5.7
Brasil Telecom Brazil 1,746 3.8
Sider Nacional Brazil 1,671 3.7
Vale do Rio Doce Brazil 1,586 3.5
Femsa Mexico 1,575 3.5
Grupo Modelo Mexico 1,519 3.3
Telecom de Chile Chile 1,510 3.3
Banamex Mexico 1,423 3.1
Grupo Televisa Mexico 1,242 2.7
Enersis Chile 977 2.1
Kimberly-Clark de Mexico Mexico 884 1.9
Gerdau Brazil 848 1.9
Cemex Mexico 826 1.8
D & S Chile 805 1.8
Embratel Brazil 767 1.7
Soriana Mexico 720 1.6
Telesp Celular Brazil 678 1.5
Wal-Mart de Mexico Mexico 665 1.5
CANTV Venezuela 621 1.4
EMP Nacional Chile 468 1.0
FINANCIAL CALENDAR
Year End 28 February 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 and low cost ISA contact Mark Pope on 020-7545-0520, e-mail address:
mark.pope@db.com. Further details of the 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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