BlackRock Latin American Investment Trust NAV rose +2.9%, significantly outperforming the benchmark

BlackRock Latin American Investment Trust plc (LON:BRLA) has announced its latest portfolio update.

All information is at 31 August 2024 and unaudited.

To learn more about the BlackRock Latin American Investment Trust plc please follow this link: blackrock.com/uk/brla     

Performance at month end with net income reinvested

^cum income

^^The Company’s performance benchmark (the MSCI EM Latin America Index) may be calculated on either a Gross or a Net return basis. Net return (NR) indices calculate the reinvestment of dividends net of withholding taxes using the tax rates applicable to non-resident institutional investors, and hence give a lower total return than indices where calculations are on a Gross basis (which assumes that no withholding tax is suffered). As the Company is subject to withholding tax rates for the majority of countries in which it invests, the NR basis is felt to be the most accurate, appropriate, consistent and fair comparison for the Company.

Sources: BlackRock, Standard & Poor’s Micropal

At month end

#Total assets include current year revenue.

##The yield of 6.3% is calculated based on total dividends declared in the last 12 months as at the date of this announcement as set out below (totalling 28.59 cents per share) and using a share price of 452.10 US cents per share (equivalent to the sterling price of 344.00 pence per share translated in to US cents at the rate prevailing at 31 August 2024 of $1.314 dollars to £1.00).

2023 Q3 Interim dividend of 7.02 cents per share (Paid on 09 November 2023)

2023 Q4 Interim dividend of 8.05 cents per share (Paid on 09 February 2024)

2024 Q1 Interim dividend of 7.39 cents per share (Paid on 13 May 2024)

2024 Q2 Interim dividend of 6.13 cents per share (Paid on 08 August 2024)

*The discount is calculated using the cum income NAV (expressed in sterling terms).

**Net cash/net gearing is calculated using debt at par, less cash and cash equivalents and fixed interest investments as a percentage of net assets.

*** The Company’s ongoing charges are calculated as a percentage of average daily net assets and using the management fee and all other operating expenses excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items for the year ended 31 December 2023.

^Total assets for the purposes of these calculations exclude bank overdrafts, and the net current assets figure shown in the table above therefore excludes bank overdrafts equivalent to 7.6% of the Company’s net asset value.

*excluding net current assets & fixed interest

Commenting on the markets, Sam Vecht and Christoph Brinkmann, representing the Investment Manager noted;

The Company’s NAV rose +2.9% in August, significantly outperforming the benchmark, MSCI Emerging Markets Latin America Index, which returned +0.2% on a net basis over the same period. All performance figures are in sterling terms with dividends reinvested.¹

Emerging markets posted modest gains of +1.6%, continuing to underperform Developed Markets (+2.5%). The month began with a sharp equity sell-off driven by two macro events: a weaker-than-expected US labour market report, raising recession fears, and a BOJ (Bank of Japan) rate hike that led to a sharp appreciation of the JPY and a carry trade unwind. This resulted in the largest intraday spike in the VIX (volatility index) since 1990. Despite these initial shocks, Emerging Markets recovered as US recession fears eased with better growth and inflation data. Latin America posted positive returns, outperforming GEM (Global Emerging Markets). The gains were primarily driven by strong performance in Brazil (6.7% m/m) and Chile (3.4% m/m), both of which outperformed Developed Markets . Argentina (off-index) was the best performer of the month, with a 16.3% m/m increase. Conversely, Mexico, Peru and Colombia underperformed the region. Despite positive returns in August, Latin America remains the worst-performing region year-to-date among global regions, down 12.6%.

At the portfolio level, our overweight and stock selection in Brazil and our stock picks in Mexico were the key positive contributors to performance. On the other hand, stock picking in Chile hurt us on the margin over the month.

From a security lens, IRB, the Brazilian reinsurance company, was the largest contributor over the month, reversing losses from July. an overweight position to Brazilian bank, Bradesco, was another significant contributor. The company reported a beat on 2Q earnings with a lower cost of risk. Renner, the Brazilian retailer, also helped returns after delivering strong 2Q results driven by earnings growth and improving sentiment around the company’s financial condition. Another strong performer was the Brazilian stock exchange B3. In addition to delivering a small beat on 2Q earnings, the stock also rose in tandem with the Brazilian market as it is a market proxy.

On the flipside, an overweight to Brazilian footwear manufacturer, Alpargatas, detracted, despite delivering strong second quarter results. We maintain conviction in the name and used the weakness to top up our position. The Mexican market fell more broadly, impacting beta sensitive stocks like Banorte, which was the second largest detractor to performance in August. An overweight position in Brazilian truck leasing company, Vamos, also detracted. Whilst 2Q results were a miss, we think the company is in a good position to grow given its high market share in untapped markets in Brazil.

We made some changes to the portfolio in August. We reduced overall exposure to Brazil, trimming into recent strength and taking profit on names like B3, Bradesco and Renner. Within Brazil, we also added to investment management platform XP and financial technology and software solutions provider, StoneCo. XP has made a lot of progress to make the business more efficient (in response to higher interest rates), while Stone is benefitting from cyclically strong payment volumes. We initiated a holding in Seatrium, a Singapore based engineering solutions provider which is building offshore oil equipment for Brazilian state-owned oil producer, Petrobras. Elsewhere, we added to gold miner, Franco-Nevada, which would benefit significantly from a restarting of the Cobre Panama copper mine.

Mexico is the largest portfolio overweight as at the end of August. Multi-country appears as our second largest overweight due to off-benchmark holdings in miner, Franco-Nevada and engineering solutions provider, Seatrium. On the other hand, we remain underweight in Peru due to its political and economic uncertainty. The second largest portfolio underweight is Chile.

Outlook

We remain optimistic about the outlook for Latin America. Central banks have been proactive in increasing interest rates to help control inflation, which has fallen significantly across the region. As such we have started to see central banks beginning to lower interest rates, which is supporting both economic activity and asset prices. In addition, the whole region is benefitting from being relatively isolated from global geopolitical conflicts. We believe that this will lead to both an increase in foreign direct investment and an increase in allocation from investors across the region.  

Brazil is the highlight of this thesis, with the central bank having already cut the policy rate considerably and economic activity improving strongly, while realized inflation remains benign. However, fiscal trends have disappointed in the first half of the year, which has led to higher inflation expectations and a sell-off in both the currency and interest rates. In response to this, the Brazilian central bank will likely pause its rate cutting cycle and instead hike interest rates in the short term to prevent the currency from selling off further. We remain comfortable with our equity positioning because the underlying earnings trends are positive, driven by the strong economic activity.

We remain positive on the outlook for the Mexican economy as it is a key beneficiary of the friend-shoring of global supply chains. Mexico remains defensive as both fiscal and the current accounts are in order. The outcome of the presidential elections in early June has created a lot of volatility for Mexican financial assets, with the Peso depreciating significantly. Investors are concerned that the landslide win of president-elect Sheinbaum and the Morena party will result in reduced checks and balances for the government. The passing of the controversial judicial reform in early September is a good example of this. We are certainly concerned about the implications of the reform for judicial independence. We have visited Mexico in the week after the election to meet with investors, business owners and political advisors. Our conclusion from that trip is that we believe the government will remain relatively pragmatic and fiscally prudent, as it has been during AMLO’s term. We have therefore used the market correction to add to certain positions.

We continue to closely monitor the political and economic situation in Argentina, after libertarian Javier Milei unexpectedly won the presidential elections in November 2023. Milei is facing a very difficult situation, with inflation around 270% year-on-year, FX reserves depleted and multiple economic imbalances. To further gauge sentiment on the ground, we travelled to the country in January 2024. The trip further instilled our cautious view on the economic outlook for the country, and we see no fundamental reasons as to why we would want to buy this market now. We have become incrementally more cautious on Argentina over the past month, as the weakening of the informal exchange rate suggests that the official exchange rate might be overvalued. Therefore, we see the risk of another exchange rate devaluation, which could reignite inflationary pressures.

The recent data in the United States supports our thesis that the US labour market is slowing down, enabling the Federal Reserve to start easing interest rates in September. This should be supportive for Emerging Market carry countries, including Latin America.

¹Source: BlackRock, as of 31 August 2024.

To learn more about the BlackRock Latin American Investment Trust plc please follow this link: blackrock.com/uk/brla