Aberdeen Latin American Income Fund Limited

An update from our investment manager, Viktor Szabó - 12 November 2020

In the context of the still uncertain environment and taking into consideration the effect of the pandemic on the operating environment for companies, we are most positive with those holdings which already have sound business fundamentals pre pandemic and which have been taking the opportunity of this crisis to strengthen their businesses and emerge stronger, also taking advantage of this momentum to accelerate market consolidation, organically and inorganically. Some examples to cite are the Brazilian shoemaker Arezzo, retailer Lojas Renner, pharmacy chain operator Raia Drogasil and Mexican retailer Walmex. These companies can capitalize on favourable digitalization trends and on the acceleration of online sales adoption by consumers where we have seen positive responses from management teams and believe they should all emerge stronger from this crisis. In the case of Arezzo, beyond strengthening their omni channel strategy as the other three have, they also announced an acquisition recently opening a new growth avenue for the company. We believe these companies can navigate well even under tougher environments but should we see a sustained economic recovery in the region they are also well positioned to leverage on that and deliver solid earnings growth.

At the moment we see the largest potential upside in Brazil. Recovery expectations are relatively muted (IMF forecasts 2.8% growth for next year, while the central bank’s latest Focus survey has it at 3.3%), while local markets have adequately priced in the deep recession, the subpar healthcare pandemic response and the significant fiscal deterioration this year. Indeed, the Brazilian real was among the worst performing currencies this year (depreciating by close to 40% against the sterling) while the long end of the government bond yield curve sold off despite the unprecedented monetary policy easing delivered by the central bank. The high frequency data shows a strong recovery unfolding from Q3, with upside surprises. A stronger than expected economic recovery could also ease the fiscal concerns and reduce the populist political pressure to extend the covid-related fiscal spending into the next year. We are reassured by the economic team’s commitment to maintain the constitutional spending ceiling next year and are also encouraged by the continued structural reform momentum. Better currency performance could also be supported by improved external balances (the current account balance has been in surplus since April while FDI remained robust) and lighter investor positioning (due to portfolio outflows earlier in the year). The biggest risk to this positive view is Brazil’s fragile fiscal position, which could worsen should the strong rebound in economic activity fade.