Report for month March 2001
Deutsche Latin American Cos Tst PLC
11 April 2001
REPORT FOR THE MONTH OF MARCH 2001
SUMMARY
March was another month of significant declines in global equity
markets, and Latin America mirrored their falls. Over the month the
MSCI Latin America Free Index fell by 5.5% in sterling terms, led down
by Brazil. The Brazilian market, which declined by 10.9% in sterling,
was hit by concerns over the situation in Argentina which led to severe
pressure on the currency. In response Brazil raised interest rates, in
a move which took the equity market by surprise. In contrast, the
Argentine market rebounded from its lows to end the month in positive
territory. Mexico stayed relatively firm as the currency appreciated
against the dollar due to strong investment inflows.
Developed markets fell by a similar amount to Latin America in March;
however, for the first quarter, Latin America has been a relative
outperformer, with the index up by 1.4% in sterling terms against the
MSCI World Index down 8.7%.
Our performance was weak over the month, as our NAV fell by 10.3%, due
to our overweight Brazil allocation and geared exposure to banking and
telecoms stocks in that market which showed some of the heaviest falls
over the period. We also saw many of the more cyclical names in Mexico
outperform while media, telecoms and most beverage stocks did poorly.
Our share price declined by a similar proportion to the NAV so that the
discount stayed constant over the period.
We believe that the ability of Argentina's new Economy Minister Domingo
Cavallo to build confidence in his economic plan will be key for the
region in the short to medium term. A reduction in Argentine risk
would allow interest rates to fall throughout the region and support in
particular the Brazilian and Chilean currencies. If improved domestic
confidence in Argentina can boost growth and investment, then the
region's future will look brighter. Without growth, Argentina will
almost certainly need to default on its debt, with highly negative
implications for the rest of the market.
BRAZIL
The Brazilian market fell by 10.9% in March as concerns over Argentine
risk caused the Real to weaken by 6% against the dollar. As a result,
the Brazilian Central Bank raised interest rates by 50bps to 15.75%
citing inflation concerns. This surprised the equity market which was
largely expecting a continued decline in rates this year. However,
these expectations were further depressed when the Central Bank raised
its year end inflation forecast to 4.8%, recognising that the weaker
currency and strong economic growth were a threat to its 4% inflation
target. There are also signs that foreign direct investment into
Brazil seems to be slowing. These economic concerns met continued
political uncertainty to provoke a further market sell off. Further
gloom was added by the news that Petrobras had lost one of its largest
offshore oil rigs in an explosion that killed 10 workers.
Since the month end, the Brazilian currency has strengthened and the
equity market rallied in response to more positive news in Argentina.
We believe that the long term economic outlook for Brazil is good and
that the market has now discounted the fact that interest rates are
unlikely to fall much this year, although we do need to watch the
impact of a consumer boom on output, inflation and the trade balance.
MEXICO
Our neutral stance in Mexico did not work well in March, as both the
equity market and the currency were relatively robust. The Mexican
index fell by only 2.2% in sterling terms over the month, outperforming
the region. Interest rates are still high, at 15.5%, while inflation
has been benign and oil prices relatively supportive. The latest
inflation figures to the end of March show 12-month CPI at 7.2%, still
above the Central Bank's 6.5% target for the year end, but there are
now definite signs of a slowdown in the economy that should bring this
target within reach. The peso has been supported by continued strong
inflows of foreign investment including the purchase of a controlling
stake in cellular operator Iusacell by Vodafone. The introduction of
fiscal reform legislation to Congress dominated the political agenda
together with consideration of the situation in Chiapas. Consensus now
seems to be building for the fiscal reform project among the political
parties although questions remain over its likely depth and timing.
News flow is likely to be more positive in Mexico over the next few
months though the main risk remains the trade balance, affected by
slowing US demand and by the oil price.
The equity market saw strong gains among several cyclical stocks
including conglomerate Alfa and construction group Ica. However,
media, telecoms and banking stocks underperformed.
ARGENTINA
The Argentine market was the main focus of attention in March. After
retracing almost all its January gains, it rebounded at the month end
to close up 3.2% in sterling terms. The appointment of Ricardo Lopez-
Murphy as economy minister lasted only a few days, as the social impact
of his new round of spending cuts was politically unpalatable to the
ruling coalition. He was replaced by the architect of convertibility,
Domingo Cavallo, who took over demanding special powers from Congress
to fast-track approval of his new economic plan. Cavallo, a master
politician as well as an economist, has launched a supply-side package
designed to restore Argentine competitiveness, for which he has
gathered significant political support. He has also secured financing
for Argentina's fiscal deficit from the local banks. The debt market
has begun to respond more positively to the plan in recent days which
has allowed equities to recover. Although we remain cautious,
convinced that this is Argentina's last chance, Cavallo's policies
offer the possibility of a no-default escape route in which lower
rates, higher investment and positive growth can build. As a result,
we have added a small position in two key stocks in order to reduce our
underweight. However, we believe that our Brazil overweight already
reflects a significant degree of Argentine risk (as evidenced in March)
and therefore would be reluctant to add more in the short term.
CHILE
The Chilean market was relatively defensive in March, falling by only
1.6% in sterling although the currency was weak against the dollar,
influenced by concerns over Argentina (where many Chilean businesses
have substantial investments) as well as by the stagnation in the
domestic economy which prompted the recent rate cut to 4%. GDP growth
numbers for January disappointed, with only a 3.6% rise YOY, and the
unemployment rate is flat at 8.4%, while industrial production
continues weak. Retailers were hurt in March by the poor outlook for
consumer demand, evidenced by disappointing retail sales figures.
Telecoms major CTC also underperformed.
ANDEAN MARKETS
The smaller markets underperformed during March with the exception of
Peru, which remained in positive territory (+0.6%) on the expectation
of a market-friendly outcome to last weekend's first-round Presidential
elections. However, since former President Alan Garcia has
unexpectedly joined Alejandro Toledo in the second round runoff,
confidence has collapsed as fears of Peru reversing its recent economic
reform have grown. Colombia fell by 10.7% as the currency weakened on
lower interest rates and signs of economic deceleration. Venezuela
declined 7.6%, led by CANTV which followed the global de-rating of
telecoms stocks. Steel maker Sivensa also sold off on debt concerns.
Domestic economic activity remains weak despite increased government
spending. We made no changes to our portfolio during the month.
NET ASSET VALUE
Fully diluted
31/03/01 28/02/01 31/03/01 28/02/01
80.3p 89.5p 84.4p 91.7p
MID-MARKET SHARE PRICE 31/03/01 28/02/01
Ordinary Shares 70.25p 78.50p
Warrants 17.00p 20.00p
NAV based on total assets less current liabilities of £38.7 million (£43.2
million).
Market exposure
31/03/01 28/02/01
% %
EQUITIES
Argentina 0.8 -
Brazil 41.1 43.0
Chile 10.1 10.3
Colombia 0.4 0.4
Mexico 34.6 32.8
Venezuela 0.9 1.4
TOTAL PORTFOLIO 87.9 87.9
Net Current Assets 12.1 12.1
------ ------
--
TOTAL 100.0 100.0
------ ------
Based on total assets of £49.3 million (£53.6 million).
GEARING
Gearing at 31/03/01 28/02/01
27.2% 24.1%
===== =====
LARGEST HOLDINGS (market value £39.2 million equal to 90.4% of total
portfolio)
% of
Country £000's portfolio
Telmex Mexico 4,526 10.4
Petrobras Brazil 3,355 7.7
Ambev Brazil 3,129 7.2
Banco Itau Brazil 2,743 6.3
Tele Norte Leste Brazil 2,420 5.6
America Movil Brazil 2,102 4.8
Femsa Mexico 1,967 4.5
Unibanco Brazil 1,716 4.0
Vale do Rio Doce Brazil 1,674 3.9
Banamex Mexico 1,580 3.6
Electrobras Centrais Brazil 1,548 3.6
Grupo Modelo Mexico 1,418 3.3
Telecom de Chile Chile 1,370 3.2
Grupo Televisa Mexico 1,205 2.8
Sider Nacional Brazil 1,193 2.8
Enersis Chile 975 2.2
Kimberly-Clark de Mexico Mexico 949 2.2
Brasil Telecom Brazil 829 1.9
Wal-Mart de Mexico Mexico 815 1.9
Cemex Mexico 781 1.8
Gerdau Brazil 761 1.8
D & S Chile 642 1.5
Endesa Chile 520 1.2
Embratel Brazil 478 1.1
CANTV Venezuela 465 1.1
FINANCIAL CALENDAR
Preliminary Results Announced 18 April 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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