BlackRock Latin American 18 January 2023
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Latin America makes up only c. 9% of the MSCI Emerging Markets region, and so is unlikely to feature significantly in many investors’ portfolios. Yet the region has a number of key strengths that look well-suited to the current market environment, and which mean Sam Vecht and Christoph Brinkmann, the managers of BlackRock Latin America Investment Trust (LON:BRLA), believe the region could be set for a strong recovery at some point during 2023, well before the ponderous developed world.
The region is rich in natural resources, including the fossil fuels of crude oil and natural gas, the production of which has been limited in some parts of the world, creating favourable supply and demand dynamics. It is also a major source of copper and lithium, critical materials for the green energy revolution. With the removal of Russia from Western supply chains, the importance of Latin America in these markets has only increased. Sam and Christoph point out that politically Latin America has maintained trading relations with the West and its rivals in Russia and China, which brings economic benefits.
Additionally, the managers believe that the Brazilian central bank - Brazil makes up 61% of the region’s market capitalisation - is likely to be in a position to cut rates relatively early in 2023, having taken decisive action to raise rates to 14%, which has already led to inflation falling precipitously from its peak in the country. In their view, Latin America is likely to recover sooner than the developed world, potentially boosting equity returns.
BRLA is the only trust focussed exclusively on Latin American equities and pays a quarterly Dividend of 1.25% of the quarter-end NAV, equivalent to a yield of 5% on NAV (6% on the share price at the time of writing). After a strong 2022, this has been supplemented with a very large special dividend for 2022 of 13 cents, more than twice the annual payout, which reflects both an improvement in the revenue generated by the portfolio and the effects of the tender offer to reduce the share count.
A clear indication of the conviction the BlackRock emerging markets teams have in Latin America is the fact their global funds have their largest overweight to the region for a decade. In Sam and Christoph’s view, the region is on the verge of a cyclical recovery, with various factors meaning the recessionary moment will be briefer than it will in the West. BRLA generated positive returns in 2022 thanks to the weakness of sterling, but, in our view, the supportive macro factors mean the region could be a relative bright spot again next year, this time in constant currency terms.
In our view, there are also interesting long-term trends which could support the region for some time to come. Chiefly, the trend to what has been called ‘deglobalisation’, but which might perhaps more properly be considered as a rewiring of the world economy involving the shifting of supply chains away from China and Russia, should increase the appeal of Latin America as a source of commodities and potentially as a locus for manufacturing. We note that China is increasingly important to the return path of the emerging market index and Latin America provides an effective hedge against an economic decoupling of the country from the West. Meanwhile, the importance of commodity producers to the Latin American equity market offers diversification to the technology and ecommerce stocks which sit at the top of the MSCI Emerging Markets Index.
- High commodity prices benefit the portfolio and the region
- Offers a 5% annualised yield on NAV
- An experienced management team with deep resources to draw on
- Energy and commodity markets can be economically sensitive which could bring high beta in a global recession
- Latin American markets and politics can be extremely volatile
- Any increase of gearing brings greater exposure to falling markets, as well as rising markets