Liontrust Latin America Fund

The Liontrust Latin America Fund returned -1.1% during the quarter, compared with a return of -2.2% for the MSCI EM Latin America Index and -1.4% for the IA Latin America sector (both comparator benchmarks)*.

Global equities suffered a bout of volatility during the third quarter as weak US employment data renewed fears over a looming recession. Combined with the Bank of Japan’s surprise hike, this led to a sharp reduction in the yield differential between the US and Japan, a stronger yen and unwinding of the carry trade. For a brief period, there was even talk of an emergency rate cut from the US Federal Reserve, although over the weeks that followed, US data improved and the BoJ calmed the market over the prospect of aggressive hikes. The Fed was able to deliver a 50 basis point (bps) cut in September without spooking the market, and equites staged a solid rebound from the August turmoil. Latin American equities declined by 2.2% during the quarter, behind developed markets’ 0.2% return and emerging markets’ 2.5%, aided late in the quarter by the promise of expansive Chinese stimulus. Within Latin America, Brazil, Chile and Peru returned +/- 1% while Mexico and Colombia declined by 8-9%.

As the Federal Reserve (finally) began to lower interest rates in September, Brazil’s Central Bank (BCB) was moving in the opposite direction, hiking rates by 25bps and taking them back up to 10.75%. The BCB was one of the first central banks globally to start raising interest rates in the face of higher inflation back in March 2021, a full twelve months before the Fed, and the early and decisive move ensured that inflation fell back to target relatively quickly. This has allowed rates to come down over the past year from a peak of 13.75% to 10.5%. Further cuts were pushed back due to delays in the widely anticipated US easing cycle, and more recently there have been two factors which have started to push inflation expectations modestly higher. One is the strength of the domestic economy which has consistently surpassed expectations over the past two years along with a very strong labour market, and the second is the lingering doubt over the government's commitment to fiscal consolidation in order to meet the targets set out in the fiscal framework. This has weakened the currency which resulted in slightly higher inflation more recently and higher expectations. In order to retain its credibility, the BCB (and the market) determined that a brief hiking cycle was necessary to re-anchor inflation expectations. Brazil already has some of the highest real interest rates in the world, and this move is likely to support the currency which itself will help lower inflation, as well as pushing longer term expectations downwards. It is important to note that this is expected to be a short cycle, possibly finishing by year end, and that interest rate cuts can resume next year, especially if the Fed cuts in line with current market forecasts.

The weakness in Mexico was mainly due to peso depreciation stemming from concerns over the government’s fast track approval of the Judicial Reform and the likely weakening of the institutional and legal framework that has managed to keep AMLO (Andrés Manuel López Obrador) largely in check through his six-year term. Claudia Sheinbaum became president on  October 1^st and delivered a business and market-friendly opening speech, emphasising the priorities of investment, nearshoring and the USMCA trade agreement, all of which will be key to reaccelerating growth. Throughout the campaign she talked of policy continuity and more recently has reiterated her commitment to fiscal responsibility and the need for more private and foreign investment – including reforms required to take advantage of the immense nearshoring opportunity. A Sheinbaum presidency is likely to be far more constructive than her predecessor both by addressing specific issues relating to nearshoring and expanding Mexico's manufacturing base, and in her relationship with the private sector more broadly.

The Fund’s Q3 return was slightly ahead of the MSCI Latin America Index following positive contributions came from Brazilian utility companies Sabesp and Cemig, while e-commerce giant Mercadolibre also performed strongly – most notably reported earnings per share for Q2 ahead of consensus estimates. Partly offsetting this was weakness in Mexican banks and energy companies.

Latin American equities are trading at just 8x forward earnings, a 30% discount to the broader emerging markets and its own ten-year history. Even as global recession fears have eased, significant risks still seem to be priced into regional equities.

Discrete years' performance (%) to previous quarter-end:

*Source: FE Analytics, as at 30.09.24, primary share class, total return, net of fees and income reinvested.

KEY RISKS

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund. The Fund may encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. Investments in emerging markets may involve a higher element of risk due to less well-regulated markets and political and economic instability. This may result in higher volatility and larger drops in the value of the fund over the short term. Outside of normal conditions, the Fund may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. ESG Risk: In reference to any component (where applicable) of a fund's investment process that uses external ESG data, there may be limitations to the availability, completeness or accuracy of ESG information from third-party providers, or inconsistencies in the consideration of ESG factors across different third party data providers, given the evolving nature of ESG. There is no guarantee that an absolute return will be generated over a three year time period or within another time period.

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