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Thomas McMahon
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Updated 27 Mar 2024
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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 (BRLA) has reported on an exceptional year of performance in 2023, during which period it outperformed its benchmark as well as broad global and emerging market indices.
  • The NAV total return for the year was 37.8% in US dollar terms, ahead of the 32.7% total return of the MSCI EM Latin America 10/40 Index. The shares rose 35.3% in USD and 27.6% in GBP.
  • Strong stock selection, particularly in Mexico, drove the outperformance, as well as the decision to overweight domestic Brazilian stocks in expectation of interest rate cuts.
  • Total revenue return fell by 26.6% on 2022 as dividends paid by portfolio companies declined. However, this is immaterial to the dividends paid by BRLA, which are paid at a rate of 1.25% of NAV, quarterly, from capital if required. Dividends totaling 28.82 cents per share were declared for 2023, compared to 26.12 cents for 2022.
  • Despite the strong performance, the discount slightly widened over the period, from 9.1% to 11.5%. No shares were bought back by the board.
  • BRLA has a performance-related conditional tender offer to be implemented should the 2026 continuation vote be passed. This will see up to 24.99% of the shares bought back at NAV less 2% and costs if the NAV total return does not exceed that of the benchmark by 0.5% a year in the four years to 31/12/2025. As of the end of 2023, the trust was ahead by 1% annualised.
  • The other triggering condition is that the shares have traded on an average discount of 12% over the whole calculation period. As of the end of 2023, the discount had averaged 10.8% over the first half to the calculation period.
  • Chairman of the board, Carolan Dobson, said: “The geopolitical environment is currently changing with three blocks emerging, US aligned, China aligned and the non-aligned, who are benefiting from trading with both of the other blocks. The markets in the Latin American region have managed to remain somewhat removed from the global geopolitical conflicts and so far, have been able to benefit from significant opportunities for direct investment as governments and businesses globally re-think supply chain configuration and seek to diversify risk away from countries more prone to geopolitical fallouts. The region is rich in natural resources of crude oil and natural gas and is also a major source of copper and lithium which are critical materials for the green energy transition. Not only is Latin America rich in natural resources, it is also an agricultural powerhouse. The region accounts for close to 25% of global exports in agricultural and fisheries products, and its significance in the global food supply chain is anticipated to increase in the future. The board is optimistic for the outlook for Latin American equities.”

Kepler View

Latin American equities’ strong returns may have slipped under the radar of many investors. While the attention was on the US, LatAm equities outperformed the S&P500 over 2023. Yet even after a year of strong absolute returns, they still trade on attractive valuations, not just versus the US market, but versus their own history.

Looking forward, there are a number of strong structural headwinds behind the region which make us optimistic about the potential for future returns. The first is the geopolitical realignment which is seeing companies shift manufacturing from China to other emerging markets. Mexico is a key beneficiary, and this near-shoring trend helped propel its market’s 41% return in 2023. During the year, Mexico overtook China to become the US’ largest trading partner. Another is the green energy transition, which is driving a huge rise in demand for key minerals and metals in which the region is rich. BlackRock Latin American’s (BRLA) largest holding is Vale, a diversified miner with exposure to copper amongst other metals, and it also contains SQM, a major producer of lithium, essential to EV batteries. BRLA’s manager, Sam Vecht, argues that Latin America has the ability to be a low cost producer of lithium and other metals essential to the transition which should see demand rise over time.

On top of this, the domestic economic situation in the key countries is looking healthy. Brazil cut rates in August, and expectations of further cuts to come in that country and in Mexico could be supportive for equities. A key risk would be a slowdown in the US economy given the importance of trade with the US for the region, and we note that currently it looks like a “soft landing” in the US is most likely, which would see gradual rate cuts while the economy remained reasonably healthy.  

BRLA benefitted from strong market returns in 2023 – the beta – but also delivered attractive alpha. Sam and his co-manager Christoph Brinkman made a well-timed move into domestic Brazilian equities which benefited the portfolio. They also had successful stock picks in Mexico, notably consumer retailer FEMSA and real estate operator Fibra Uno Administracion. Fibra Uno has benefitted from increased demand for industrial properties stemming from the near-shoring theme and anticipation of a spin-off vehicle for its industrial sector assets.

In our view BRLA is a highly attractive way to access the differentiated growth opportunity in Latin American equities. The management team have delivered alpha in their first two years, and retain the ability to gear up the portfolio to add to the return potential. The team are well-resourced and in our view well-placed to manage an allocation to this often overlooked region.

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