BlackRock Latin American 11 May 2022

BlackRock Latin America (BRLA) offers exposure to the commodity-rich Latin American equity markets, which are flourishing in the current inflationary environment. As we discuss under Performance, BRLA was the top-performing investment trust in any sector during Q1 2022, thanks to the strength of commodity markets and the strength of its currencies boosting corporate profits. Yet despite high commodity prices seeming to become entrenched, the region still trades on a significant discount to its five-year average valuation.

BRLA is managed by Ed Kuczma and Sam Vecht, who bring BlackRock’s considerable resources to bear on top-down macroeconomic research and bottom-up fundamental analysis with the aim of identifying high-quality companies and adding value through stock selection. Ed has 17 years’ experience investing in Latin America and describes the region’s balance sheets as being in the best state he has ever seen them.

BRLA’s portfolio typically has a high allocation to commodity producers, reflecting the makeup of the region’s markets. This, along with the exposure to energy and banks, means the region and the portfolio are typically more exposed to the value factor. This brings with it diversification value versus global bonds (see Performance) which might prove attractive in the current environment of rising interest rates. Commodity producers also bring exposure to some secular themes in the energy transition (see Portfolio).

BRLA pays a dividend of 1.25% of NAV each quarter (5% on an annualised basis) from capital reserves where necessary. This means BRLA offers a high yield without being constrained to buy high-yielding companies, which might have worse growth prospects.

The trust trades on a discount of 8.4%, and there will be a 24.99% tender offer at the AGM in May (see Discount).

BRLA looks particularly attractive at this point in time. The high exposure to commodity producers is key, as it means corporate profits and economic activity should be strong in the region if commodity prices remain elevated. While returns have been strong year-to-date, valuation multiples remain low versus history, and a reversion of this gap could be an extra source of returns in the coming months. Latin America is a beneficiary of high commodity prices, which have been supported by tight supply conditions following the pandemic, and further exacerbated by the tragic events in Eastern Europe.

Global trade and capital flows are in flux and Latin America is in a position to step in as a source of raw materials and labour and a place to invest. BRLA is the only equity-only investment trust offering access to the Latin America region, and offers geared exposure to this potentially high-return market.

However, investors have to be prepared for volatility. High inflation will affect consumers in Latin America which could cause issues for some companies and sectors which governments will have to negotiate. Should global inflation tip the world economy into recession, this will have a negative effect on cyclical sectors such as energy and financials, which are a major part of the portfolio. There are also elections in Colombia and Brazil, and political instability is a perennial issue for the region. That said, the immediate outlook looks good for LatAm, and it offers good diversification from political risks in China and Russia and duration in growth stocks.