e-fundresearch: "Which facts are relevant in the current market environment to value Latin American stocks?"
Anders Damgaard, fund manager, "ISI Latin America Equities" (ISIN: DK0016259260) (21.05.2012): "Brazil´s Central Bank pursues a policy of aggressive rate cuts. The currency will most likely weaken further against the US-dollar. Inflation may become a problem later this year in Brazil."Angel Ortiz, fund manager, "Fidelity Funds - Latin America A-USD" (ISIN: LU0050427557) (22.05.2012): "We value Latin American stocks the same way regardless of the economic environment. Throughout the cycle, we look for good stocks with strong balance sheets that have the ability to deliver and increase free cash flow returns for shareholders."
Lionel Bernard, Portfolio Manager, "Amundi Fds Equity Latin America - AU (C)" (ISIN: LU0201575346) (25.05.2012): "In the current market environment, Latin America stock markets are going to continue to be influenced by economic developments in the OECD and in China. In the euro zone, the weakness of leading indicators suggests that the economic situation remains fragile. Despite the easing of financial stress through ECB intervention, concerns in Europe remain with rising sovereign risks and fiscal austerity measures in many euro zone countries. The US economic growth remains robust, supported by domestic demand and may prove sustainable until the US presidential elections and the year end. However, the result of the election giving or not a majority to the next president will be critical to assess political and economic risks going forward. Chinese economic health is another relevant factor to value Latin American stocks While China’s Q1 GDP figures came in weaker than expected, there are tentative signs that growth may bottom out in the next months. Beside the impact on global trade growth, this increases uncertainties surrounding prices of natural resources. A potential negative move of commodity prices could prove to be a major drag for Latin America’s currencies and its large material sector. Finally, macro-economic developments within the Latin America region are key. In our view, on a relative basis, Latin American countries benefit from solid economic fundamentals, healthy sovereign risks, low leverage, commodity rich status, foreign corporate investment, attractive valuation and ability to implement monetary and fiscal stimuli."
Tommy Kirk Korsgaard, Portfolio Manager, "Jyske Invest Latin American Equities" (ISIN: DK0016261241) (16.05.2012): "Roughly 45% of the export from Latin America comes from globally priced commodities. China’s share of global commodity consumption has roughly increased from 10% to 40-50% since 2000 and should therefore be considered price setters for copper, iron ore, coal etc. So when valuing Latin American stocks, the single most important assumption is the growth forecast for China.
Despite that cyclical stocks are looking cheap on traditional earnings multiples, especially sectors as metals and mining, we remain underweight due to our assumption of declining Chinese growth. We are by no means pessimists in regards to Chinese growth, but simply feel more comfortable with the earnings visibility offered by domestic consumption in Latin America. Domestic consumption in Brazil continues to be supported by record low unemployment, an increase in minimum wages by 14% in 2012, credit availability is becoming cheaper and more available."
Alexandra Vanhuyse, Portfolio Manager, "KBC Equity Latin America Cap" (ISIN: BE0146026415) (23.05.2012): "Current Market Environment
- Brazil (62% of MSCI Latin America): near term cautious stance, more positive into H2
Government has been proactive in reducing the official interest rate in an effort to spur economic growth (Selic rate currently at 9%, further rate cuts expected) , but the knock on effect is taking some time to come through. The industrial side of the economy is particularly weak (most recent figure of industrial production -2% vs consensus expectations of +1%) as inventories are high and questions have arisen on the strength of Chinese GDP growth. PMI Manufacturing index also fell to 49.3 in April, indicating that executives in the industrial sector are sensing a slowdown in activity from the previous month (leading indicator). Q1 Earnings season in general disappointed, but domestic consumption has held up well so far. Overall, GDP and earnings expectations have been revised down across the board, with GDP growth for 2012 now estimated at 3.4% and EPS growth around 5% (down from 7.5% last month – not overly optimistic). Looking into H2, we expect a pick-up in earnings quality/growth as the year on year comparison basis is getting more favourable. There might be opportunity for additional loosening of policy (in terms of fiscal expansion). Valuations have come down a bit, now trading at 9.5x 12 month forward earnings, below historic 10x.
- Mexico (22% of MSCI Latin America): positive view
Mexico has been lagging for quite a while against Brazil in terms of macro-economic strength but it seems as though the tide has turned. Both industrial and consumer have been pretty strong so far this year, boosted by a (slow but) steady recovery in the US (85% of Mexican exports are shipped to the US). In terms of macro-economic indicators, so far this year we have had positive surprises and capacity utilization & PMI Manufacturing have been on an upward trend. Inflation has not been a concern (around 3% annualized vs. Brazil in 2011 well above target range & currently around 5.5% annualized) and the Central Bank has not needed to cut interest rates. As is typical in election years, infrastructure spending has been ramped up significantly, which should have a positive effect on the broader economy. The main concern remains violence, especially in the north of the country. The presidential candidates have made this theme their number one priority, so we should expect to see some positive news on that angle."
Daniel Isidori, fund manager, "Threadneedle Latin American Ret Acc GBP" (ISIN: GB0001531754) (22.05.2012): "The most relevant facts are:
• Dynamics of Latin American economies
• International environment restricting flows to risky assets such as Latin American equities
• Specific company fundamentals and business models
• Exposure of companies to domestic consumption
• Stock specific risk and catalysts
Even though the market is currently influenced by international flows driven by “risk on / risk off” sentiment, the underlying fundamentals for both the economies and companies in LATAM are attractive. Given an uncertain global environment, companies with domestic exposure to sectors such as consumption, infrastructure and financial penetration represent attractive investment opportunities."
e-fundresearch: "Which are the most important elements in your investment process?"
Anders Damgaard, fund manager, "ISI Latin America Equities" (ISIN: DK0016259260) (21.05.2012): "We try to compare the global themes with local issues in each country. Then we choose attractive sectors in each country, and we usually spread the investments in various stocks in each sector. The commodity market is generally dependent on developments in China. Here it was expected that the Chinese central bank would have eased considerably more to help the economy through a period of lower growth. But the authorities in China are apparently satisfied with the progress that slowly gets inflation and house prices down. We keep an eye on the Chinese authorities if they are becoming more aggressive with respect to jumpstart the economy.
Renewed growth in China will be of great benefit to the stock markets in Latin America."
Angel Ortiz, fund manager, "Fidelity Funds - Latin America A-USD" (ISIN: LU0050427557) (22.05.2012): "This fund is run from a co-management perspective in the truest sense of the word. While the two portfolio managers are responsible for their respective sectors, no stock may be included into the fund without approval from both managers. Accordingly, all ideas are heavily scrutinised and only the very best ideas make it into the portfolio."
Lionel Bernard, Portfolio Manager, "Amundi Fds Equity Latin America - AU (C)" (ISIN: LU0201575346) (25.05.2012): "The most important elements in our investment process are three main sources of performance geographic allocation (country selection), sector allocation within each country and stock picking. Those three sources are combined in top-down and bottom-up approaches in order to take into account the specific characteristics of investment and management risks inherent to emerging markets. They are founded on the constant re-evaluation of outlook vs. relative valuations vs. risks. In addition, the team looks for a strong portfolio diversification targeting performance stability and superior risk management."
Tommy Kirk Korsgaard, Portfolio Manager, "Jyske Invest Latin American Equities" (ISIN: DK0016261241) (16.05.2012): "We invest in companies with cheap valuation and positive earnings momentum with good sustainability. We implement the investment process within a sector and country neutral approach, aiming to pick the winners in each sector and country."
Daniel Isidori, fund manager, "Threadneedle Latin American Ret Acc GBP" (ISIN: GB0001531754) (22.05.2012): "The most important elements in our investment process are:
• Exchange of ideas with other Threadneedle teams (global sector, fixed income and developed and emerging equities)
• Understanding of macro and political dynamics
• Knowledge of small-mid size companies and their business models
• Consistent framework for stock selection process identifying companies with sustainable growth, high quality management, strong balance sheet and at an attractive valuation.
• Disciplined approach using target prices
Although we are stock-pickers, our investment process considers a broad range of inputs. Practically, this means that we leverage the insights of our colleagues from across the investment floor covering various asset classes to gain a better perspective and understanding of the key macroeconomic developments and themes that are likely to play out – this highlights segments of the market that are likely to be a good source of opportunities or a source of risk. This way, our stock picking is not conducted in isolation.
Threadneedle’s top down analysis enables the team to put the prospects for individual stocks and sectors into context, while the thematic work that our investment team carries out makes each desk aware of broad, structural trends at play. By ascertaining the global economic outlook, we can decide where we are likely to find profitable opportunities and where we should focus our research resources.
Individual positions selected for the fund are the object of a detailed analysis which includes understanding the stock fundamentals, such as the competitive structure of an industry, as well as independently valuing the business and interacting with company management to validate our assumptions."
e-fundresearch: "Which over- and underweights do you currently hold?"
Anders Damgaard, fund manager, "ISI Latin America Equities" (ISIN: DK0016259260) (21.05.2012): "We have a country weight in Brazil at the benchmark level. It is quite possible that share price increases could be offset by a weaker currency. Exporting companies should benefit from it, but we are waiting for signals of more growth in China before we increase investment there. Brazilian banks are under intense pressure from the government to lower interest margins. We continue having an underweight in Brazilian banks. The Fund has an overweight in Brazil by companies which benefit from lower interest and which have inflation-proof income. We expect the Mexican currency to strengthen against the Brazilian. We maintain an overweight in Mexico, with a predominance in several of the largest stocks in the benchmark."
Angel Ortiz, fund manager, "Fidelity Funds - Latin America A-USD" (ISIN: LU0050427557) (22.05.2012): "We are currently biased toward the telecoms sector in Mexico, Brazil and indeed across Central America, particularly with regards to those companies in the mobile segment. Within Mexico, we have invested in America Movil, which is gaining from increased data penetration and share buybacks from its principal shareholder. The fund is also exposed to Tim Participações, which is a mobile telecom operator in Brazil, with strong infrastructure enjoying the benefits of more Brazilians using mobile telephony over fixed line equivalents.
We are also overweight both consumer staples and discretionary names. The main structural economic drivers within Latin America are a still-growing consumer base, record low unemployment and rising real wages. This has created the conditions for strong consumption growth over the long run. In 2012, the consumer continues to benefit from some cyclical advantages created by falling interest rates and declining rates of inflation. And this creates a number of opportunities ranging from the low cost homebuilders such as MRV Engenharia to higher end department stores such as Lojas Renner."
Lionel Bernard, Portfolio Manager, "Amundi Fds Equity Latin America - AU (C)" (ISIN: LU0201575346) (25.05.2012): "We have under- and overweight’s on three different levels:
a) country-level: Brazil is the largest overweight exposure while Chile represents the largest underweight position, closely followed by Colombia.
b) sector-level: Consumer discretionary (mainly retail and home builders) is the largest overweight, while energy, financials and consumer staples have become the most important underweight positions.
c) stock-level: we favour stocks coming from the area of consumption, real estate (selectively), some banks in Mexico and Peru, and materials (copper and pulp paper). Our underweight positions are on some stocks related to commodities (like oil or cement), food and beverages as well as large Brazilian financial stocks."
Tommy Kirk Korsgaard, Portfolio Manager, "Jyske Invest Latin American Equities" (ISIN: DK0016261241) (16.05.2012): "Overweights:
x Ecopetrol – Colombia’s national oil company and one of few vertically integrated oil companies in Latin America. Although valuation has become stretched from recent outperformance we continue to prefer the fundamentals of the Colombian oil sector versus its Brazilian peers.
x Femsa – Latin America’s leading consumer company with presence in nine countries. Activities are divided between the Coca Cola bottling division (KOF) and the fastest growing operated store chain in Americas (OXXO). Especially the growth in OXXO has surprised the market, expected additions in total number of stores is expected at 1150 for 2012 reaching a total of 10676.
x Copa – Panama based airliner with exceptional strong pricing power due to activities in profitable niche markets – secondary destinations that don’t typically generate sufficient demand to justify point-to-point connections. The geographic location of the hub in Panama is ideal for passengers travelling between North- and south America.
Underweights:
x Walmart Mexico – Expensive valuation and legal overhang from expected bribery lawsuit.
x Petrobras – No doubt an oil company with very impressive reserves, but disappointing production growth and government interference a negative.
x Ambev – The fifth largest brewer in the world and largest beverage company in Latin America. Outstanding story but very stretched valuation, so after a long period of great performance, we have become sellers of Ambev."
Alexandra Vanhuyse, Portfolio Manager, "KBC Equity Latin America Cap" (ISIN: BE0146026415) (23.05.2012): "The fund is currently managed passively. We have no significant active bets in the portfolio at the moment."
Daniel Isidori, fund manager, "Threadneedle Latin American Ret Acc GBP" (ISIN: GB0001531754) (22.05.2012): "The fund’s overweighs in consumer staples and discretionary reflect an attractive bottom up opportunity set and conviction in the underlying economic trends identified. For example, our overweight in Hering, a fashion retailer with an average ticket price of roughly USD 50, reflects our conviction in the rising consumption power evolving in Brazil. Furthermore, a few of the fund’s overweighs such as commercial properties and transportation reflect not only the domestic opportunity, but also provide protection against one of the risk factors we see in Brazil - inflation (for example shopping malls, commercial properties and toll roads in which the revenue stream is linked to inflation).
The main underweight is in the material space given lack of conviction in the short to medium term direction of the global economy. Furthermore, there are some company specific risks that make the space less attractive. For example, Vale, one of the world’s largest iron producers and a heavy stock in the index, is facing a tax dispute amounting to almost 15% of its market cap. In the utilities space the underweight is driven by poor return profile and current un-attractive valuations.
Over-weights
Sectors:
• Consumer Discretionary
• Consumer Staples
• Financials through Commercial Properties
• Industrials mainly Transportation
Countries:
• Brazil through consumer stocks
• Panama
• Peru
Stocks:
• Hering
• Localiza
• Pacific Rubiales
Underweights
Sectors:
• Materials
• Utilities
• Information Technology
Countries:
• Chile
• Colombia"
e-fundresearch: "Please comment on the performance and risk parameters of your fund in the current year as well as over the past 3 and 5 years."
Anders Damgaard, fund manager, "ISI Latin America Equities" (ISIN: DK0016259260) (21.05.2012): "The fund generally does better than its benchmark and at the same time the fund has less fluctuation in returns compared to benchmark."
Angel Ortiz, fund manager, "Fidelity Funds - Latin America A-USD" (ISIN: LU0050427557) (22.05.2012): "We have managed the fund over the last three years, so we can only really comment on the performance prior to that period. During our tenure, the fund has outperformed the market through strong stock selection rather than sector or country allocation, which is consistent with our view that this is a bottom-up focused fund.
Our benchmark, the MSCI Latin America 5% Capped Index, prevents Petrobras and Vale from overwhelming the index, which is particularly important from a risk perspective.The index does not have more than 5% in any one stock. Accordingly, the fund is less biased towards commodity; cylical related industries and more broadly diversified – thus giving the fund a more consistent, risk-return profile."
Lionel Bernard, Portfolio Manager, "Amundi Fds Equity Latin America - AU (C)" (ISIN: LU0201575346) (25.05.2012): "The fund is this year pretty much in line with its benchmark. The evolution of the market is still driven to a certain extent by the subdued global growth outlook in a context of ongoing deleveraging and still high energy prices.
Therefore, volatility is high YTD. In the last years, Latin America economies have been reasonably affected by the financial crisis: Brazil has been the last emerging country to enter the crisis and has also been the first to exit the crisis. This should be the most important element taken into account by investors.
Due to our broadly diversified portfolio, the three levels of alpha that we have and our GARP style, we feel well positioned for different market phases. Our approach lead to a continuous outperformance versus the market in nearly all market phases seeing the fund’s gross performance strongly ahead of the benchmark over 3 and 5 years."
Tommy Kirk Korsgaard, Portfolio Manager, "Jyske Invest Latin American Equities" (ISIN: DK0016261241) (16.05.2012): "We have underperformed our benchmark (MSCI Latin America 10/40) on a 3 and 5 year horizon, but have outperformed during the last year. The portfolio has been positioned to benefit from a weakening in the local currencies versus USD, which means low exposure to companies with significant USD debt and input priced in USD, and this strategy is behind the outperformance year to date. The relative risk of the portfolio is low due to a sector and country neutral approach – which is combined with a beta around 1. Main relative risks is our exposure to companies with cheap valuation and earnings momentum."
Alexandra Vanhuyse, Portfolio Manager, "KBC Equity Latin America Cap" (ISIN: BE0146026415) (23.05.2012): "Performance:
- Year to date (16/05 – 29/12): fund -1.86%: very strong start to the year (+11% in Jan, + 2.5% in Feb, since March sell off / BRL depreciated against the EURO by nearly 10%)
- FY2011: fund -18.6% - please see attached annual comment 2011
Risks:
- Beta vs. MSCI Latin America 1, vs. MSCI W AC 1.29
- Tracking error vs. MSCI Latin America: ex ante 0.6%, ex post 3%."
Daniel Isidori, fund manager, "Threadneedle Latin American Ret Acc GBP" (ISIN: GB0001531754) (22.05.2012): "The performance of the fund has been similar to the index year to date. The Latin American fund is -5.20 % as of 18-May-2012 in GBP vs. -5.16% the benchmark. The main contributors have been consumer stocks specially the more discretionary ones such as Hering and Lojas Renner and Industrials like Copa Airlines, a Panamanian airline. On the other hand, energy and financials stocks detracted from performance. Regarding countries, Panama, Peru and Mexico contributed positively to performance whereas Brazil, Chile and Colombia were negative contributors.
Year to date
• Risk
Objective is a to be within 3 to 6% tracking error vs the benchmark and we are currently at 3.65%
• Performance (as of 18-May-2012 in GBP)
-5.20 % vs. -5.16% benchmark
3 years (as of 30-Apr-2012 in GBP)
Performance 19.79 % vs. 17.57% benchmark
5 years (as of 30-Apr-2012 in GBP))
Performance 10.68 % vs .12.58% benchmark"
e-fundresearch: "Which specific market potential and risks do you currently see in the region?"
Anders Damgaard, fund manager, "ISI Latin America Equities" (ISIN: DK0016259260) (21.05.2012): "Intervention by the Brazilian government, where the intention is to limit inflation, but at the same time it affects corporate earnings. A somewhat weaker than expected growth in China. A lower global growth could push especially the Brazilian currency further down."
Angel Ortiz, fund manager, "Fidelity Funds - Latin America A-USD" (ISIN: LU0050427557) (22.05.2012): "There are three key risks that we see for the Latin American equity market, two of which are exogenous to the region. The first is a slowdown in the Chinese domestic economy, which would impact the demand for exports from Latin America; the second is a continuation of the European debt crisis and the impact that would have on the local currencies; and the third are the political risks within the region.
Among the key drivers for the fund over the long term will be the region’s attractive demographics, the rise of the consumer and the ample availability of all kinds of natural resources. The plentiful water in the region is a theme we like and which we are currently playing this story through utilities. For example, the yields on hydro stocks in Brazil and Chile appear particularly compelling. Another avenue to access this story is by investing in selected food producers, many of which enjoy low costs of production."
Lionel Bernard, Portfolio Manager, "Amundi Fds Equity Latin America - AU (C)" (ISIN: LU0201575346) (25.05.2012): "Relatively good leading indicators from the US, China and emerging markets are offset by continuous weakness in the Euro zone. While global economic uncertainties remain, further unconventional policy accommodation from Central Banks could be a catalyst for equities, and especially in Latin America. Aggressive rate cuts and other policy responses in Brazil resulting from slower-than-expected economic recovery have been putting pressure on the currency. Strong response should however positively impact GDP from the end of this year. Meanwhile, the region’s other economies continue to show strength across the board, benefiting also from underleveraged situation and solid economic fundamentals. We see very limited contagion risk to the MSCI Latin America equity index countries from the ongoing expropriation of YPF by Argentina’s government.
We believe that with its recent underperformance versus smaller markets, Brazil valuation become even more attractive, on a relative basis. Brazil keeps the advantage of having the most leeway in terms of monetary policy as inflation expectations have been improving lately. In addition, Brazil enjoys a deeper market where opportunities are relatively easier to find. However, the increasing will from the government to interfere in the local economy, including the banking industry, has not helped the country performance in the past few months. It has also made it more difficult to have strong top down / sector convictions. In Mexico, we expect positive outcome for July presidential election and potentially more decisive reforms post elections (energy, fiscal). However, the country’s fate is still highly tied to the US economic situation. In spite of its strong medium term fundamentals, the main issue for Colombia, in our view, is market valuation. We think the same is true for Chile. Peru continues to look attractive thanks to growth at quite reasonable price, as well as improving political environment."
Tommy Kirk Korsgaard, Portfolio Manager, "Jyske Invest Latin American Equities" (ISIN: DK0016261241) (16.05.2012): "The majority of risks are related to exports to China, but sentiment from the European debt crisis and the US will continue to determine performance in the short run. We are in the midst of a growth decoupling between emerging and developed countries, but as long as investors considers Latin America as high risk, the decoupling won’t materialize in stock returns. Therefore any potential in Latin America will need a better macro environment to materialize."
Alexandra Vanhuyse, Portfolio Manager, "KBC Equity Latin America Cap" (ISIN: BE0146026415) (23.05.2012): "For Latin America in general:
- Further global woes: EU/Grexit?, strength of Chinese economy?
For Brazil specifically:
- Weaker than expected data from China
- Further government intervention
- Domestic side (consumer) weakening on top of industrial side
- BRL depreciating further
For Mexico specifically:
- Weaker than expected data from the US (85% of Mexican export is destined for the US)
- Violence resurging (despite intent of presidential candidates that Security is the number 1 priority)."
Daniel Isidori, fund manager, "Threadneedle Latin American Ret Acc GBP" (ISIN: GB0001531754) (22.05.2012): "Opportunities
• Latam is a region of growth driven by a robust domestic demand supported by strong labour markets
• Latin American countries have manageable fiscal accounts. Additionally, they are in a strong position considering the historically high levels of international reserves and low financing needs to face a potential worsening of economic scenario
• The region has an abundance of resources that places them in a favourable position to take advantage of China’s growth.
Risks
1. Latin America specific risks
• Increasing Government intervention in Brazil
The current Brazilian government is increasing the intervention in several sectors. For instance, the government is pressuring banks to reduce interest spreads and increase lending.
• Weak competitiveness across countries.
If we look at the latest Global Competitiveness Index Ranking from the World Economic Forum, we could see that Latin countries overall rank low in institutions, infrastructure, health, labour market efficiency, technology readiness and innovation.
This weak competitiveness is mainly a result of low level of investments. Investment as a percentage of GDP remains in the low 20s.
• Inflation
2. Exogenous risks
• Turmoil coming from the Euro zone
• Slowdown in Chinese economy."
Performance Daten der Top-10 Auswertung per 14.05.2012:
