Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by BlackRock Latin American. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
- Last week, BlackRock Latin American (BRLA) released their annual results for the financial year ending 31 December 2020. Over the financial year the NAV fell by 14.5% in US Dollar terms, compared to a fall in the benchmark of 13.8%. In Sterling terms, the NAV fell by 17.2% and the benchmark fell by 16.2%. The share price fell by 9.3% in US Dollar terms and 12.1% in Sterling terms.
- While Latin American was hit hard by the impact of the pandemic, it performed very strongly in the final quarter as markets rebounded. In fact, November saw the region’s markets record their best monthly performance in decades as optimism about vaccines swept markets. Thanks partly to the region’s exposure to cyclical industries such as materials and oil & gas, earnings momentum in Latin American at the end of 2020 and early stages of 2021 has been firmly positive, and seen multiple upwards revisions.
- The trust has continued to pay a dividend of 1.25% of USD NAV each quarter, the board using its ability to make contributions from capital to make up any shortfall in the revenue account.
- Looking forward, the managers report, “the earnings outlook for Latin American within the global context is robust and attractive, especially given the region’s large exposure to cyclical sectors such as financials, energy and materials that should benefit most as economies re-open.”
We think Latin American equity markets could be very interesting at this point in the cycle, with the world hopefully seeing a recovery from the pandemic through the rest of 2021. The region has a high exposure to cyclical materials and energy companies which could do well as global demand returns, as has been seen in the global reflationary rally since last autumn. The Latin American index has historically had a high beta to global equity markets, as we discuss in greater detail in our recent note, which could work to shareholders’ favour if the current global recovery continues.
However, it is worth noting that the pandemic continues to rage in some parts of the region, with Brazil seeing infections run out of control in recent weeks. We think this, as well as some profit-taking, could be a reason Latin America trades at a significant discount to other emerging markets. There are also political risks to consider, with Brazil holding presidential elections in 2022, and President Bolsonaro facing pressure to intervene in energy markets.
Concerns about political risk and the course of the pandemic led the portfolio managers, Sam Vecht and Ed Kuczma, to reduce their overweight position in Brazil towards the end of 2020, with the largest overweights now being to Mexico and Chile. They believe Mexico is likely to benefit from the huge US stimulus programme, which should also be true of materials producers across the region too. The latter will also benefit from the green policies being pursued global governments – as countries push for ‘net zero’ the demand for materials used in electric vehicles, solar panels and other equipment will rise.
While the slight underperformance of the benchmark was disappointing in 2020, given the year saw the biggest global shock for over a decade we would be inclined to hold off judgement. We note positions in Brazilian banks were the largest detractors in the year as they were blindsided by the pandemic and their outlooks changed unforeseeably. Since taking over the trust in early 2019 Sam and Ed have employed a more active approach to managing the portfolio, evident in a more concentrated number of holdings and use of gearing, which we think makes it more likely stock selection will drive returns and in our opinion creates a more attractive long-run proposition. The portfolio is currently tilted towards companies Ed and Sam believe will benefit from higher external growth from the US and China, buoyant commodity prices and liquidity from accommodative monetary and fiscal policy in developed markets.
BRLA is the only trust investing purely in the equities of Latin America. The trust is trading on a discount of 6.9% at present which, given the low valuations in the regions and the tailwinds towards commodities, we believe could offer a potentially attractive entry point.
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