Liontrust Latin America Fund

Q1 2020 review

The Liontrust Latin America Fund returned -44.3%* during the first quarter of 2020 compared with a return of -41.9% for the MSCI EM Latin America Index.

The first quarter of 2020 has brought an end to the post-Global Financial Crisis bull market in developed market equities. With the surging US dollar, emerging markets have had a particularly tough time and Latin America has not been spared. The acute stage of the coronavirus panic and market selloff began on February 23rd, when Italy reported an outbreak in its northern regions. At this point, it became clear that the virus was not a regional concern but a global pandemic. The ensuing collapse of the OPEC+ talks sent oil prices down to $30/bbl (-55% YTD) which put further pressure on global equities.

Ahead of this crisis, one of the major attractions to Brazil was that it was at a very different stage in the cycle – following its recession in 2015/16 it was in the early stages of recovery. This formed one of the three key pillars to the investment case, along with low rates supporting rotation from fixed income into equities, and an unprecedented reform drive. The latter two pillars remain in place, while the nascent economic recovery has been interrupted by the coronavirus outbreak. Following the correction, valuations are looking increasingly attractive. At 1x price to book, Brazil is trading at a 40% and 35% discount to its 5- and 10-year averages, respectively, a more than two standard deviation discount. Given the attractive underlying fundamentals, we think this is presenting some very interesting investment opportunities for long term investors.

Mexican valuations were already depressed prior to the rout in global markets. Growth has been evasive and a recession is now inevitable. However, with no major external imbalances, a systemic crisis appears unlikely. AMLO appears to be edging back towards the centre, much like he did while Mayor of Mexico City, and a more private sector friendly approach may well be required to help ignite an economic recovery. Having fallen from already depressed levels, Mexico is now trading at a 50% discount to its historic averages, also a more than two standard deviation discount.

With structurally lower interest rates in Brazil following the passage of a comprehensive pension reform last year and a wide ranging structural reform agenda still to be implemented, it could be argued that valuations should command a premium to historic levels, while in Mexico the low growth outlook and policy uncertainty should command a discount. That said, both appear to be trading at levels well below fair value and as a result we continue to see the best investment opportunities in these two markets which currently account for over 80 per cent of the portfolio.

Chile is one of the major beneficiaries of a lower oil price as they import 100% of their consumption. While a collapsing oil price initially sends shock waves through global markets as the shorter-term impacts are fiscal pressures for oil exporters, the medium-term benefits will be material. We have used the weakness in Chile that began with the social unrest in October 2019, and was exacerbated by the current crisis, to add two new positions to the portfolio, having previously had no holdings in Chile.

While there is clearly a huge amount of uncertainty around when coronavirus cases will peak, how deep a recession it will cause and for how long, and how efficiently global fiscal stimulus can see a return to growth, we continue to focus on those companies generating value for shareholders over the long term and which are currently being sold at material discounts to intrinsic value.

 

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

 

Mar-20

Mar-19

Mar-18

Mar-17

Mar-16

Liontrust Latin America C Acc GBP

-35.3

4.7

8.3

49.5

-1.9

MSCI EM Latin America

-37.8

0.4

6.3

41.7

-6.2

 

*Source: FE Analytics as at 31.03.2020.

 

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Tuesday, April 21, 2020, 2:17 PM