Report for Month of June 2000

Deutsche Latin American Cos Tst PLC 12 July 2000 The Deutsche Latin American Companies Trust supports the AITC its campaign REPORT FOR THE MONTH OF JUNE 2000 SUMMARY June saw a sharp rise in the Latin American markets as US data continued to indicate the potential for a soft landing in that economy. As expected, the US Fed did not raise rates at its June meeting although it indicated that it would remain vigilant for signs of inflationary pressure. This calmer backdrop allowed the regional index (MSCI Latin America Free) to rise by 7.4% in sterling terms over the month, led by steep gains in Brazil and Mexico, both up over 10.7%. Brazil was driven by interest rates resuming their downward path, as we had predicted. Mexico initially lagged Brazil but then did well in the last week of the month, as election fears abated, the currency strengthened and investors began to build positions ahead of the July 2 poll. The startling outcome of the election, which unexpectedly gave PAN Presidential candidate Vincente Fox a clear margin of victory over the ruling PRI and a considerable bloc of seats in Congress, caused widespread euphoria within Mexico and was greeted with resounding approval throughout the international community. Furthermore, the election was seen to be a fair and transparent process with a high level of voter participation. After 71 years of PRI rule, Mexico is now entering a new stage in its history. Our NAV rose by 10.1% during the month, outperforming the regional index by a wide margin as our Brazil overweight and good regional stock selection came to the fore. For the second quarter, our NAV fell by 0.5% against an index fall of 3.1%, again showing significant relative outperformance despite the fall in absolute terms. In June our share price performance lagged the NAV rise, up by only 8.4%, as towards the end of the month the discount widened to over 21.0%. This was principally due to a 4.0% fall in the stock price on the final day of the month on which we held our AGM: it has since recovered. At the AGM, our shareholders voted that we should continue as an investment trust for another twelve months. We are grateful for their support and undertake to make every effort to improve returns over the coming year. We should also mention that shareholders voted to change the name of the company to Deutsche Latin American Companies Trust PLC. MEXICO All eyes in the last few days have been on Mexico. The enthusiasm generated by the unexpected Presidential election victory of Vicente Fox, with a margin of around 7%, has been spectacular. The transparent and orderly nature of the process, and the statesmanlike conduct of President Zedillo in conceding the PRI's defeat have delighted Mexicans and Mexico-watchers alike. During the period before the election the market made little progress: 28-day interest rates rose as high as 17% from their low of 12.8% in early April, and the currency weakened from P9.51 to P10.07 to the US dollar. However, after a 26% fall in the index since March, a perception that concerns were exaggerated led investors to move back in the final days before the election, bringing a 10% rally. The purchase of 32% of Bancomer by BBV also strengthened the peso, while the successful earlier placement of the $1.7bn Telmex secondary offering had removed an overhang from the market. Once the election results were announced, the currency strengthened further and the market rose sharply. Interest rates have already fallen back to 14.3%. We are extremely pleased with the election outcome for Mexico, but following the sharp rally we would sound a modestly cautious note: the two main factors affecting Mexico's economic performance over the near to medium term are the health of the US economy and the strength of the oil price, over neither of which President Fox will have control. In addition, the defeat of the PRI may cause some instability within that party which could potentially determine the efficacy of Fox's policy efforts. Importantly, he has announced his intention to cooperate with the outgoing government during the transition period before he takes office in December. On the economic front, Fox has already stated that it is his priority to reduce the fiscal deficit to 0.5% of GDP by 2001 and to increase FDI from $12bn to $20bn, potentially by allowing private investment in the electricity and energy sectors. He also intends to submit a draft 2001 budget to Congress by 15 October. During the month, the Mexican Central bank tightened monetary policy through the Corto mechanism as a reaction to strong economic growth and a weakening peso. Consumer spending grew 9.2% YOY in Q1, with retail sales surging by 11% in April. We believe that monetary policy is likely to stay tight for the rest of the year. The best performing stocks during the month were the blue chip consumer- sensitive telecoms, beverages, retailers and Banacci. The conglomerates, particularly Alfa, and miner Grupo Mexico underperformed. During June we sold down our weightings in Desc and Alfa to neutral; despite considerable underperformance year to date their poor earnings outlook means that valuations are no longer compelling and we cannot identify a likely catalyst which would bring about a re-rating. Those sales took our Mexico weighting below the benchmark. However, on any weakness we will be looking to add to stocks with a brighter earnings outlook. BRAZIL The Brazilian market rose by 10.7% in sterling terms over the month. The main event was a larger than expected cut in the benchmark Selic interest rate, which was reduced by 100bp to 17.5%, with the committee announcing a move to an easing bias. Rates were cut by another 50bp on Friday 7 July. These moves are wholly justified given the rapid decline of inflation since the last 25bp cut in February: we expect the year-end inflation figure to be 5.5% and for nominal interest rates to end the year at 14.5%. Fiscal results continue to beat market expectations. Reserve requirements on demand deposits were also cut from 55% to 45% in a further move by the Central Bank to increase liquidity and boost economic growth. We are already seeing a cyclical recovery in demand for durable goods, which should feed through into better economic growth and more job creation. We remain strongly positive on Brazil, with an overweight position of over 8.5% against the benchmark. Our favoured sectors continue to be telecoms and banking. The month's best performers included cellular telecoms, Petrobras (which is preparing a global offering), utility Eletrobras and aircraft manufacturer Embraer. Telesp underperformed going into the Telefonica stock swap. During the month we added to our holdings in cellular company Telenordeste Celular, which has been a strong performer, and steel company CSN where the cross-ownership issues with CVRD are close to being resolved. CHILE The Chilean market fell by 5.0% in sterling terms during June. The larger liquid names, including CTC and Enersis, underperformed. This followed a strong rally in May when capital controls on foreign investment were removed. In a further measure to boost foreign interest in the local stock market, the Finance Minister announced that a bill would shortly be presented to Congress to abolish capital gains tax. The economic recovery continues in Chile: GDP growth was 6.4% in April. However, inflation remains relatively subdued, at 3.7% for the year to June, with the principal risk coming from the high oil price. We made no changes to our Chilean portfolio during the month. ARGENTINA The Argentine market rose by 4.8% in June, most of which was achieved in the last few days of the month when news flow turned slightly more positive. The June tax revenue figure (up 15.4%) lifted the market, as it meant that Argentina had met the Q2 IMF fiscal target. This improvement was largely due to advance payments of this year's income tax and the success of a tax moratorium. The April trade figures showed a strong 14.5% growth in exports and subdued import growth. However, we still believe that the rest of the year's targets will be difficult to achieve given weak economic growth and the effect of further budget cuts. Unemployment has risen to 14.7% against 13.8% last October. GDP grew by a weaker than expected 0.9% in Q100, although an improvement from a 0.3% fall in Q499. Construction activity fell 4.7% MOM in May, a stronger dip than April's 1.7% fall. We remain underweight in Argentina and sceptical about its economic recovery. Our only holding, energy conglomerate PC Holdings, outperformed the local index with a 12% rise in dollar terms in June. Telefonica Argentina fell, hit by selling pressure following the Telefonica share swap, and Banco de Galicia continued to suffer the effects of its badly received capital restructuring proposal. ANDEAN MARKETS There was a wide variation in performance between the smaller Andean markets last month, but they all underperformed the regional index. Colombia fell by 13% in sterling terms as political uncertainty continued, delaying the passage of important fiscal reforms. Planned privatisations have also been postponed. However, the economy is showing some signs of recovery with GDP growth rising 2.2% in Q1: in another confidence-boosting measure, the US Senate approved a $1bn aid package to combat drug trafficking. The Colombian peso has been very weak, falling by 16% against the US dollar year to date. Peru rose by 1.5% in sterling terms, as the market recovered from the controversial May Presidential elections: economic sanctions against Peru have been ruled out by the Organisation of American States who are instead pursuing an agenda to strengthen democratic institutions in the country. The economy grew by 6.6% in May, and by 6.2% over the January to May period, with the strongest growth shown in fishing, agriculture and manufacturing. Venezuela fell by 2.7% in June after the buyout of utility EDC by AES was successfully concluded. The stock has been dropped by the local indices as trading liquidity has now been dramatically reduced. Presidential, congressional and gubernational elections, originally scheduled for May 28, were set for July 30: President Chavez now seems likely to overcome the challenge from his rival Arias. BSCH announced plans to purchase Banco Caracas, the country's fourth largest bank, through its Banco de Venezuela subsidiary, to create Venezuela's largest financial institution. As for stock returns in these markets, Telefonica del Peru underperformed (down 22.0% in dollar terms) on selling pressure before the stock swap with TEF. Credicorp was a relative outperformer in Peru; however our Venezuelan telecoms holding, CANTV, underperformed. We made no changes to these holdings during the month. NET ASSET VALUE Fully diluted 30/06/00 31/05/00 30/06/00 31/05/00 98.9p 89.8p 99.1p 91.8p MID-MARKET SHARE PRICE 30/06/00 31/05/00 Ordinary Shares 77.25p 71.25p Warrants 22.25p 21.75p Market exposure 30/06/00 31/05/00 EQUITIES Argentina 1.4 1.4 Brazil 46.3 43.0 Chile 10.5 12.5 Colombia 0.4 0.5 Mexico 36.4 38.0 Peru 1.4 1.7 Venezuela 1.6 1.9 TOTAL PORTFOLIO 98.0 99.0 Net Current Assets 2.0 1.0 ------ ------- TOTAL 100.0 100.0 ------ ------- Based on total assets less current liabilities of £52.7 million (£48.4 million). GEARING Borrowings and Gearing at 30/06/00 31/05/00 £000's £000's NIL NIL ==== ==== LARGEST HOLDINGS (market value £45.2 million equal to 87.5% of total portfolio) % of Country £000's portfolio Telmex Mexico 7,811 15.1 Tele Norte Leste Brazil 3,422 6.6 Petrobras Brazil 2,610 5.1 Vale do Rio Doce Brazil 2,265 4.4 Unibanco Brazil 2,260 4.4 Banco Itau Brazil 2,252 4.4 Brasil Telecom Brazil 2,181 4.2 Telecom de Chile Chile 1,987 3.8 Femsa Mexico 1,955 3.8 Brahma Brazil 1,830 3.6 Telenordeste Brazil 1,620 3.1 Grupo Televisa Mexico 1,425 2.8 Gerdau Brazil 1,377 2.7 Embratel Brazil 1,342 2.6 Telesp Celular Brazil 1,320 2.6 Grupo Modelo Mexico 1,296 2.5 Banamex Mexico 1,253 2.4 Soriana Mexico 1,108 2.1 Cemex Mexico 1,055 2.0 Kimberly-Clark Mexico 868 1.7 C A NAC Telefonos Venezuela 844 1.6 Enersis Chile 790 1.5 Electrobras Brazil 767 1.5 Credicorp Peru 762 1.5 PC Holdings Argentina 753 1.5 FINANCIAL CALENDAR Half year 31 August 2000 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.co.uk. 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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