Report for January 2001
Deutsche Latin American Cos Tst PLC
13 February 2001
REPORT FOR THE MONTH OF JANUARY 2001
SUMMARY
Latin American markets had a good start to the year, with the MSCI Latin
America Free Index rising by 16.3% in sterling terms, triggered by the
surprise Fed rate cut on 3 January and improving sentiment towards the region
after the IMF-led package for Argentina. The strongest regional markets were
Argentina (up 32.1% on lower interest rates) and Venezuela, which rose by
26.5% on continued corporate activity. For the month, Mexico outperformed
Brazil.
Our NAV rose by 16.0% in January, in line with the index. Although our zero
weighting in Argentina meant that we missed out on the sharp rally there, we
benefited from good performance from individual stocks in Mexico and Brazil.
Our share price rose strongly, up 18.3% for the month, as the discount
narrowed to 14.4%.
As we commented last month, 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. Important factors to watch over the next twelve
months are the direction of oil prices and the extent of a slowdown in the US
economy. Our Brazil overweight reflects our belief that the Central Bank's
ability to cut interest rates will be maintained, and that the strong domestic
economy will support corporate earnings growth of above 30%. Mexico is far
more vulnerable to those negative factors, which is why we maintain our
neutral weighting. However, we are watching out for signs of an improvement
in the outlook for Mexico, as the authorities are well aware of the risks and
real rates are high.
BRAZIL
The Brazilian market rose by 13% over the month, driven by declining risk of a
default in Argentina and the two rate cuts which took the Selic overnight
interest rate to 15.2% by the end of January.
Leading indicators showed evidence of a strong end to the year: industrial
production rose by 7.3% in December, the jobless rate dropped to 5.6% from
6.8% in November and car sales were strong. Improving consumer confidence
numbers also boosted President Cardoso's approval ratings. Good economic
growth pushed the primary fiscal surplus to R$38.2bn, well above the IMF
target. However, as we have previously commented, the downside of strong
growth is the deterioration of the trade balance, which led to a lower-than-
expected improvement in the current account deficit. The weakness of trade
numbers in comparison with the government's forecast has led to a recent
weakening in the currency past the R$2/US$1 level, and may mean that the rate-
cutting cycle needs to pause. However, we believe that the improvement in
company earnings that we expect to see in the current economic environment
should allow the market a further re-rating.
The main corporate news in January was the announcement that Portugal Telecom
and Telefonica de Espana plan to merge their $10bn mobile phone operations in
Brazil, subject to approval of the regulator, to create Latin America's
largest mobile operator with almost 9.5m subscribers.
MEXICO
The Mexican market rose by 17.7% in January; early currency weakness was
reversed when the Central Bank tightened monetary policy further in response
to inflationary pressures and the trade impact of the US slowdown. Industrial
production figures for November (+4.4% YOY) have already started to show some
cooling off, while weaker export growth led the December trade deficit to
$1.5bn, its highest level since 1994. Official GDP growth targets were
lowered from 4.5% to 4% for 2001. Recent meetings with the government and
monetary authorities lead us to believe that they are only too well aware of
the risks posed to Mexico of a US recession and that they will attempt to slow
the economy by both monetary and fiscal means in order to avoid a crash
landing. With real interest rates already at levels of close to 10%, there
will be more upside in the Mexican market if they can engineer a slowdown.
Good Q400 results were released by leading Mexican bank Banacci, showing an
improvement in core earnings and asset quality. We believe that it and rival
Bancomer, now owned by BBVA of Spain, should be able to continue to show a
high return in a high interest rate environment. At the same time their
lending exposure is relatively low, so that they look defensive in the event
of a US-driven slowdown. Daimler Chrysler announced the partial shutdown of
three Mexican plants as part of its global restructuring plan, triggering
concerns over further margin pressure in the conglomerate sector. We made no
major changes to our portfolio during the month.
ARGENTINA
Argentina was the region's strongest market in January, up 32.4% in sterling
terms, after the IMF support package and the surprise US interest rate cut
allowed local interest rates to fall. There was also relatively encouraging
news of a slight rise in soft commodity prices, stable oil prices and a weaker
US dollar. Local data releases were mixed, with preliminary indications of
stronger industrial production and a rise in construction activity in
December, while consumer confidence rose in January. However, poor December
tax revenues reveal the continuing weakness of the domestic economy. In a
sign of the improved confidence of financial markets in Argentina the
government successfully carried out a US$4bn debt swap in the first week of
February which enabled it to extend the overall maturity of its debt.
However, we continue to believe that it will be necessary for the country to
show a real resumption in domestic growth this year together with the
political will to press forward with structural reform in order to avoid
another deterioration in confidence.
The main corporate news was the buyout of the remaining minority shareholders
of Banco Frances by its controlling shareholder, Spain's BBVA. The premium
paid for the 32% stake led the stock up by 48% over the month in USD terms,
and values it at around 1.8 x book. We made no change to our zero weight in
Argentina over the month.
CHILE
The Chilean market underperformed the region, rising by 10.9% in sterling
terms, despite a small rate cut by the Central Bank and a strengthening
currency. After November GDP data showed a continued slowdown (+4.6%),
December industrial production and retail sales figures were weak and the
trade balance showed a surplus on weak import demand, a 25bp rate cut seemed
justified. In addition inflation figures are benign, with the core rate at
3.4% for the full year. The Central Bank has indicated it has further room to
cut rates if necessary. We believe that the lower level of rates at 4.75%,
falling unemployment, real wage stability and a calmer political backdrop
should boost consumer confidence and contribute to stronger domestic demand
this year.
US brewing group Anheuser Busch bought a 14% stake in Chilean beverage company
CCU, part of the Luksic group, from local minority shareholders. This
agreement cements AB's distribution agreement with CCU and has focused
attention once again on the strategy of rivals including Heineken and Ambev in
the Southern Cone. We believe that a return to growth in Chile and Argentina
will benefit CCU but that increasing competition in its home market may limit
its effects on earnings.
ANDEAN MARKETS
The Andean markets were led in January by a 26.5% rise in Venezuela, driven by
the acquisition of food group Mavesa by brewer Polar and a rally in shares of
telecoms group CANTV on takeover speculation. The strength of the oil price
also helped the market. Venezuelan GDP growth was 5.6% in Q400, and 3.2% for
the full year, lifted by increased government spending and investment in the
telecommunications and oil sectors. The Colombian market was boosted by the
announcement that BBVA would buy out the remaining shares in Banco Ganadero.
While economic growth is improving in Colombia, unemployment is still close to
20% and peace talks with the main guerrilla groups have shown only faltering
progress. Peru is still suffering from weak economic growth, caused by
political uncertainty. Early polls ahead of the April elections show former
presidential challenger Alejandro Toledo in the lead, with not inconsiderable
support for ex-President Alan Garcia. The number of takeovers in the Andean
markets in recent months leaves liquidity seriously diminished even if growth
and political stability were to return.
NET ASSET VALUE
Fully diluted
31/01/01 31/12/00 31/01/01 31/12/00
98.0p 84.5p 98.4p 87.7p
MID-MARKET SHARE PRICE 31/01/01 31/12/00
Ordinary Shares 84.25p 71.25p
Warrants 20.75p 14.75p
NAV based on total assets less current liabilities of £48.5 million (£41.8
million).
Market exposure
31/01/01 31/12/00
EQUITIES
Brazil 44.0 45.0
Chile 10.1 9.9
Colombia 0.4 0.4
Mexico 32.2 31.3
Venezuela 1.4 1.2
TOTAL PORTFOLIO 88.1 87.8
Net Current Assets 11.9 12.2
-------- --------
TOTAL 100.0 100.0
-------- --------
Based on total assets of £58.8 million (£51.8 million).
GEARING
Borrowings and Gearing at 31/12/00 31/12/00
21.2% 24.0%
==== ====
LARGEST HOLDINGS (market value £48.3 million equal to 93.4% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 7,577 14.6
Petrobras Brazil 3,879 7.5
Ambev Brazil 3,862 7.5
Banco Itau Brazil 3,672 7.1
Tele Norte Leste Brazil 3,579 6.9
Unibanco Brazil 2,726 5.3
Sider Nacional Brazil 2,010 3.9
Brasil Telecom Brazil 1,924 3.7
Telecom de Chile Chile 1,859 3.6
Vale do Rio Doce Brazil 1,780 3.4
Femsa Mexico 1,719 3.3
Banamex Mexico 1,709 3.3
Grupo Modelo Mexico 1,614 3.1
Grupo Televisa Mexico 1,512 2.9
Enersis Chile 1,127 2.2
Gerdau Brazil 916 1.8
Kimberly-Clark de Mexico Mexico 864 1.7
Embratel Brazil 834 1.6
CANTV Venezuela 825 1.6
Wal-Mart de Mexico Mexico 805 1.6
D & S Chile 802 1.5
Cemex Mexico 755 1.5
Soriana Mexico 750 1.5
Telesp Celular Brazil 692 1.3
Grupo Carso Mexico 530 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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