Thomas McMahon
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Updated 11 Apr 2022
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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.

  • BlackRock Latin American Investment Trust (BRLA) has released its financial results for the year ending 31 December 2021. In USD terms, BRLA saw its NAV fall by 12.5% over the period, compared to an 8.1% drop in its benchmark, the MSCI EM Latin America Index. Those figures were 11.7% and 7.3% respectively in GBP terms.
  • The trust’s performance reflects a difficult period for Latin American equities. Whereas massive fiscal stimulus helped drive share prices in developed economies, it was a different story in large parts of Latin America, where government support was not so forthcoming. The trust also suffered because of its overexposure to Brazil, where a mix of currency depreciation, rising interest rates, and political instability crimped stock market returns.
  • However, since the period end the trust has performed well, generating returns of 31.4% compared to 33.8% for the index (to 31/03/2022) as Latin America has been one of the bright spots in world markets, buoyed by rising commodity prices. BRLA has been the top-performing investment trust in 2022 to date.
  • The performance during the 2021 financial year means that BRLA has met one of the conditions needed to activate the discount control policy adopted by its board in 2018. As a result, the trust will make a tender offer to shareholders for 24.99% of the issued share capital, at the latest cum-income NAV price, less 2% and realisation costs.
  • A new discount policy has also been proposed by the board. Like the prior one, it will result in a tender offer for 24.99% of the shares in issue excluding treasury shares if performance or discount-based criteria are met in the four years ending 31 December 2025.
  • BRLA maintained its dividend policy throughout the 2021 financial year, paying 1.25% of USD NAV at the close of each quarter. Dividends for the period totaled 27.56 cents per share, a 20% year-on-year increase.
  • Managers Ed Kuczma and Sam Vecht are positive on the outlook for their region this year, pointing to increases in food and energy prices of which many countries in the region are major suppliers. They also highlight higher interest rates in the region which could attract capital flows as well as relative political and economic isolation from the consequences of the war in Ukraine.
  • Chairman of the board Carolan Dobson said: “Higher commodity prices, solid earnings momentum, historically cheap currencies and equity markets especially in Brazil create the potential for attractive returns for the region as a whole.”

Kepler View

There is no doubt that 2021 was a tough year for Latin American investors, but BlackRock Latin American (BRLA) was the top-performer in the investment trust sector in the first quarter of 2022 and looks ideally placed for a new economic environment.

In particular, Latin America should benefit from raw material price inflation as well as political tensions between the West and China and Russia. Rising commodities prices should benefit companies across the region, which has large supplies of oil, gas, copper, and lithium as well as agricultural commodities. Meanwhile the region is a potential alternative trading partner for the West.

We can already see some of these dynamics coming into play, as companies in Latin America now have the highest earnings momentum in emerging markets. Compounding this is the fact that countries in the region were quick to raise interest rates during the pandemic, making their currencies some of the best performers so far in 2022. In fact, over the past 4 weeks, consensus earnings were revised up by 14% in LatAm, led by Brazil and Chile. In Mexico and Peru, earnings were revised up by c. 5%.

The outlook and environment in Q2 2022 looks extremely positive for the region. Yet Latin American equities are now averaging a 12-month forward price-to-earnings ratio of 8.6x, which is 25% below their historic average. Brazil and Chile are trading two standard deviations below their historical average valuation, while Ed notes energy and materials are among the six sectors which still look cheap relative to history, despite strong investor interest in these sectors. Ed also notes that company balance sheets in the region are the strongest he has seen in his career.

This positive macroeconomic outlook, along with improved performance, may be why we’ve seen a narrowing of the discount in BRLA shares over the past 6 months. The tender offer, which will be made to shareholders in May, could help prevent any sizeable widening of the discount in the near future.

We would also note that Latin America only makes up approximately 7% of the MSCI Emerging Markets Index, meaning most investors aren’t likely to have substantial exposure to the region. Anyone looking to diversify their portfolio may be more drawn to the region as a result.

The take-up of May’s tender offer remains hard to predict. As noted, it is likely to prevent the discount from widening substantially until it commences. Given the positive tailwinds BRLA is now experiencing, we would be surprised if many investors voted to exit. Latin America has traditionally been a volatile region, sensitive to a downturn in the global economy and with high political risks, both of which need to be borne in mind. Peru has seen violent protests this year at the cost of living, a reminder that inflation will have negative effects as well as positive for some in the region. Yet we think BRLA’s sweet spot looks likely to continue for some time.

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