The Brazilian market was also relatively strong as a weaker real provided some support to the commodity exporters. In Mexico, second quarter GDP rose by just 1.5% over the year, significantly weaker than expected. Economic activity seems to have been depressed by slower government spending in the wake of the recent election, a situation that should reverse as the new administration of Pena Nieto beds down. The latest retailers’ sales figures were also generally poor, throwing some doubt over the strength and sustainability of consumer demand with the government thought likely to increase consumer taxes to make up for any revenues lost as a result of the impending reform of the energy sector. Such concerns are however balanced by a likely increase in remittances from the US as economic activity there continues to recover. Although Brazilian second quarter GDP surprised on the upside, the market continues to be concerned by macroeconomic developments with inflation remaining stubbornly high and the currency continuing to fall. During the month the real fell to close to 2.45 against the US dollar, a level last seen during the financial crisis of 2008, prompting the central bank to raise interest rates from 8.5% to 9%. The stockmarket focused on the weaker currency, supporting US dollar earners such as the mining group Vale, up 5% over the month.
This hurt the relative performance of the Fund, which is generally underweight such areas. Consumer-related stocks, where the Fund is overweight, also tended to suffer following the hike in interest rates. A holding in the leading Brazilian supermarket chain Grupo Pao de Acucar has been added to the portfolio. Recent share price weakness created an attractive entry point to this well-managed company that is relatively insulated from changes in discretionary spending. The company is also planning to float its consumer electronics business later this year, a move that could enhance value. The only divestment was the gold miner Yamana Gold, following a disappointing earnings statement. The portfolio remains focused on quality companies that can be expected to outperform over the longer term.
