An update from managers Viktor Szabó and Brunella Isper
In this podcast we are joined by Viktor Szabó and Brunella Isper, managers of Aberdeen Latin American Income Fund. Here they discuss how Latin America is emerging from the Covid crisis, walking us through the current situation across the region. They also consider the impact of political risk in Latin America and the outlook for the next 12 months.
Recorded on 23 April 2021
Discrete performance (%)
|MSCI Emerging Markets||19.3||(24.2)||2.0||6.9||29.1|
Total return; NAV to NAV, gross income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: Aberdeen Asset Managers Limited, Lipper and Morningstar. Past performance is not a guide to future results.
Cherry Reynard: Hello and welcome to the latest in our Aberdeen Standard Investment trust podcast series, I’m Cherry Reynard.
Today we're looking at Latin America and how it's emerging from the Covid crisis. With me today are Viktor Szabo and Brunella Isper, managers on the Aberdeen Latin American Income Trust. Viktor is responsible for the fixed income side while Brunella is responsible for the equity side, welcome both.
Viktor it seems fair to say that Brazil has had a tough crisis, could you just walk us through the situation today as you see it.
Viktor Szabo: Well I fully agree with you Brazil had a difficult crisis but it's not out of the woods yet I mean, if you look at the pandemic Brazil is in its third wave, infection rates are high, new cases are higher than ever before but on the positive sides I can say that Brazil has already administered 27 million vaccine doses - quite a nice achievement. Over five and a half million people have already received both doses, so they are fully vaccinated, that's slightly less than three percent of the population. Brazil initially had some supply issues with vaccines, but they are getting over it, now they're vaccinating around 1 million people a day which I think is a decent pace. We do anticipate some slowdown in the coming days but looking at the projected supply, probably by the end of the month the pace will gather again and then they will be able to vaccinate - well at least the most vulnerable people - by the end of July.
In terms of the data, we have seen some softening recently in the PMIs - so the high frequency indicators - but probably it has at least as much to do with mobility restrictions as with the slowdown in the automobile sector which is related to the semiconductor shortage which is a global phenomenon. Otherwise social mobility hasn't fallen as much as during the first two waves of the pandemic, clearly fewer people are staying home, especially people are conscious about getting to work and young people are really happy to move I think. That is quite important for the economy, so I think the impact of the this third wave is not going to be as great as the previous ones.
Cherry: And what about the other major countries in Latin America and in which you invest so, Chile, Mexico and so on?
Viktor: Well, the Covid cases are also on the rise in those countries, and we are seeing different progress in terms of vaccinations. Chile is clearly the leader not just in the region but also globally it has quite a strong position. They have already fully vaccinated 22% of the population and further 15% have already received their first dose, so they are quite advanced. That said, they still decided to reapply some mobility restrictions as the cases are rising. Uruguay is also doing quite well, they have fully vaccinated almost five percent of the population, however in terms of the other countries if you think about Mexico, Colombia or Peru, they are not doing great in those countries - just slightly over one percent of the population is fully vaccinated, which clearly indicates that they are in early stages of the program. Although it has been mostly supply issues but in some countries it is also the lack of political will to move ahead and I’m thinking particularly about Mexico.
If you look at the mobility data there are quite interesting divergence there, so for example Mexico's mobility seemed to increase and it is also reflected in the high frequency indicators both the manufacturing and the services PMI have been rising in Mexico. On the other hand, if you look at Chile or Peru we have new mobility restriction measures, the economy is much less open than in the case of Mexico, but here again even with those mobility restrictions I do expect smaller impacts on the economies as they learn to adapt to the new reality, to this new pandemic world.
Cherry:Okay and what does that look like in practice in terms of what are your assumptions about economic recovery across the region?
Viktor: Yeah, if you look across the region, growth expectations are not upbeat to say the least. The recovery this year will be clearly smaller than the recession we have seen last year so if you think about the longer term the GDP is not going to return to pre-Covid levels this year, probably we have to wait till well into next year to see the full recovery from the pandemic.
That said the forecasts are based on a strong Covid wave and slow vaccinations here and I think we have some reasons to be optimistic that vaccination will speed up. I think supplies will increase and not just come from the original planned imports but also I think by the second half of the year many developed countries will be in advanced stages where they actually will be able to export some of the excess supplies which they have purchased. As we know many countries have over procured just to be on the safe side and that I think will help the region. Does it mean we will see high growth figures this year? Highly unlikely but probably it will be better than what the market consensus is now.
Cherry: Brunella, I wonder if we could bring you in here just from the equities side of the portfolio - how has the Trust performed during the period and have you shifted it at all to accommodate the expectation of recovery?
Brunella Isper: yeah, thanks for the question Cherry. So, I guess speaking for the Trust, in our consolidated basis, if we look at performance for one year and in February 2021, we've had perhaps a story of two halves.
So, the first half of the year we saw that significant decline in asset prices across the board - both equities and debt - specifically in March right last year, when we had the pandemic hit across the board in markets. And then we've seen recovery in the second half, so if you look at performance, where the six month period will be very different from the one year figure. So one year, the fund, if you look at share price performance, was down about 6% and that's in sterling terms - against the benchmark which declined 11%, but then if you look at the six-month period it increased 14% and the benchmark increased just under 6%. So we have been seeing a good recovery since the break of the pandemic, however the fund remains on the negative side in terms of absolute performance and I would say its important to highlight that a large part of the absolute negative performance comes from currencies such as currencies in the Latin region, have declined broadly across the board against the Sterling in the period, I think all currencies declined - with the exception in terms of the major currencies of the fund - with the exception of the Chilean Peso, which strengthened in the period helped by the commodity prices boom etc. But Brazilian currency for example which is the fund's largest exposure was down 26%, so that more than explains the decline in the overall fund NAV.
So the performance has been difficult, we are seeing recovery and if we talk about the equity performance in specifics, the fund in the same period - the equity sleeve - saw a decline of just under 14% so more exacerbated than that portfolio. And we have been doing some shifts in the portfolio across this period, so we've taken advantage of the strong market volatility as I said, we've been seeing - I mean these two halves that I explained - so we've tried and take advantage of market volatility to add and back our holdings where we have higher convictions, so things like the Mexican lender Banorte or the Chilean lender Banco Santander Chile, are places where we allocated a bit more cash over the past year.
Some stocks in Brazil like the railway operator UMO as well as the Brazilian miner Vale and the pharmacy chain operator Raia Drogasil are also places where we took opportunity of volatility to increase exposure at more reasonable valuations and really express that conviction. And then against that we've reduced a bit of our consumer names exposure and places where we had lower conviction, slow businesses, where we saw a big hit in terms of the pandemic and where we had concerns over really the performance and against valuation. So for example we've exited the Brazilian brewer Ambev also a poultry producer and we've also exited Embotelladora Andina the Coke bottler based in Chile.
And we also introduced some new names to the portfolios, there was quite a bit of activity over the past year more recently the names that we introduced were an IPO which we joined, so quite an early stage opportunity to take advantage of the growing penetration of this specific category in the online space for retailing in Brazil. We also introduced the renewables company Omega Geracao which has exposure to mostly wind farms projects, so taking advantage of that I would say increased focus towards green energy and renewables not only in Brazil and Latin but across the globe.
And another name and an example of a new stock that we introduce is Groupo Mexico which is the holding company for the copper producer Southern Copper, so it's a way to get exposure to that asset at a discount and there we see a strong story around electrification trends and increasing infrastructure spending which has really been a tailwind for copper prices where the supply demand imbalance really justifies, and we see a positive outlook there.
So just a few examples of things that we have been doing, so we've been busy over the past year trying to really position the portfolio well to take advantage of the recovery always as we come out of this crisis.
Cherry: Viktor, perhaps you could give the fixed income perspective?
Viktor: Yes Brunella has already described the market movement, so I’ll probably just add that on the fixed income side we are now facing a reflationary environment - this is where inflation picks up as the economies recover and the central banks react to that with great hikes. This is typically not a great environment for owning duration so that's why we have rotated out of some of the long duration position particularly in Brazil.
Cherry: Brunella, you mentioned a couple of IPO positions that you'd taken there. I wonder if you could talk about the IPO market in a bit more detail, it seems that there are lots of new exciting companies coming to the market and that’s sort of diversifying Latin American markets and bringing new opportunities.
Brunella: Yes so we have been seeing as Viktor said in terms of the interest rate environmental though we're now seeing kind of a reversal and an outlook of rates rising we're still at record low levels in Brazil in particular of interest rates and also across the region which really I would say stimulates companies to come to the market. Also considering the level of valuations and the amount of value that they can raise in the capital markets which have been seeing a deepening in the region over the past year, so we've been seeing more activity in terms of IPOs. More recently perhaps important to say that this activity has been mostly limited to Brazil really, as we've not seen that many new offers coming to the market in all the markets, we've seen a few in Mexico, in Peru for example but it's only a handful and quite small offers. But in Brazil, there is definitely a lot of activity taking place in 2020 as in the total year we saw 28 IPOs in Brazil raising more than 110 billion reais for these companies - the largest of them was a health care company called Rede D’Or, they operate hospitals, and they were they raised more than 10 billion reais to fund their expansion plans. And for this year we have been seeing the market continuing to - we've seen continued momentum for equity offerings and equity raising in Brazil again so there is a pipeline of 42 equity issuances registered at the local regulator - most of them are focused on the healthcare space, information technology and staples which account for about half of those and to date we've already seen 22 equity offerings taking place so a lot of activities definitely that amounted about 34 billion reais - includes follow-ons but 16 IPOs which is a lot.
So I mean for us it’s great that still the market depth in Brazil and in Latin region as a whole can be improved to give us more opportunities to invest in quite interesting industries and where we see a lot of opportunities in terms of the sectors, I mentioned in healthcare space information technology, among others - there's a lot of activity also in the real estate space. So I think that that is very good for the development of the local economies and in particular the capital markets and to give investors more opportunities in terms of the companies that are available in the stock markets.
Cherry: Okay great thank you. I wonder if we can look forward a little bit now Brunella, could you talk a bit about the mood amongst Latin American companies today - are they generally optimistic, are they confident on earnings or are you still seeing the pandemic sort of weighing on sentiment?
Brunella: So the mood, I would say that is quite mixed really according to the sector and the specific company that you're talking to, so how the sort of sector and industry has been really impacted by the pandemic and if they are or not beneficiaries of the more positive global backdrop that we're seeing or exposed to for example the U.S economic recovery and rising commodity prices as well - so it really depends.
I would say that we have been seeing some companies really take advantage of the increased penetration or the acceleration of the penetration of digital and e-commerce to really tap on that, to grow their businesses, invest more and really take advantage of how this mobility restriction has shifted consumption to online. So not only the more obvious names such as e-commerce groups like Melee that we have in the portfolio for example, but less obvious things even like Raia Drogasil, the pharmacy chain I mentioned, they had been making already quite a lot of investments in terms of their omni-channel delivery and even on their healthcare platform, so we've seen that being speeded up throughout the pandemic and them really outperforming peers and taking advantage of that. All the things like even the banks which have their online capabilities being able to reduce the amount of branches and offer more services online and make the businesses leaner, so I mean real opportunities to make businesses more efficient and come out stronger from this pandemic even the sectors which have been more hit in terms of consumption, things like the shoemaker Arreso, similarly to the pharmacy chain I mentioned, they had been investing in omnichannel and we're able to capitalize on that to continue selling through different channels and mostly online.
So I think there are pockets of growth in terms of countries, obviously Mexico and those companies more exposed to the U.S manufacturing sector and exports. There we really see a lot of optimism and likewise commodity groups or energy groups benefiting from the rising in the underlying commodity prices, so we've seen quite a significant improvement in outlook for earnings for these particular sectors. So yeah the mood is mixed but on the margin I would say there's quite a bit of optimism from companies on the ground and on what they can deliver now and even more, once recovery comes through to really take advantage of that operating leverage when we see upline recovery specifically for businesses which have seen quite a halt in activities during the pandemic.
Cherry: And do you find being based in Sao Paulo gives you sort of additional insight in into that sort of mood and what's happening?
Brunella: Yeah it definitely does even though we are all mostly based out of our homes and working from home for more than a year now, so not really being able to meet companies face to face, I guess having the ability to use digital platforms and all that technology to communication among our teams and then also with companies, has really allowed us to keep very close contact with all our holdings, with also potential new opportunities to invest, I think there has been an increased access to shareholders and potential investors in the market enabled by technology and I guess that really allows us to be very up to date with what's happening with companies, what's happening on the ground and also to do our engagement works on the side of corporate governance continuing to vote also enabled by all the technology that offers the sort of proxy votes, so I think things have continued to work quite well throughout the pandemic in terms of our contact and our ability to do our investments in-house research.
Cherry: Viktor, political risk always kind of looms a little in Latin America, I mean do you see any political risks emerging and if so where are the pressure points.
Viktor: Well Cherry, politics is never boring in Latin America as you might well know it. Even before the pandemic I mean we have seen the election of anti-establishment populist presidents, we have seen civil unrest, you know in Colombia, in Chile, we have seen a big corruption case spreading into the whole region impacting governments and then we had this pandemic which brought the deepest recession in decades, health care crisis in a few countries, a big spike in unemployment. Yet surprisingly this has not led to political instability, even in countries where populist leaders have clearly mismanaged the whole pandemic - the public dissatisfaction hasn't boiled over which is surprising a bit, but maybe also tells you something about the political maturity of the region.
So we have a few elections coming up which might help to kind of judge the public sentiment, one of them is in Chile which was postponed a bit that's the vote on the new constitutional assembly - quite interesting because the country is now redesigning its social contracts, we'll have a new constitution, so it will be quite interesting to see how the whole thing will play out. Before, towards the very end of the year, we will also have presidential and parliamentary elections. This weekend we have elections in Peru, a country which is now on its fifth president in so many years, they also had big corruption issues and the populist congress and just as few weeks ago it looked like we will end up with a left-wing candidate Yohny Lescano running against the far-left candidate Veronika Mendoza, which was clearly quite a dangerous mix for the markets. Now we see actually an economist Hernando de Soto also getting into the race with good momentum and this race is as open as it can be. We have five candidates with decent chances of making into the second round, there is a high proportion of undecided voters, so it will be really interesting to see what will happen in the next few days.
And then later on in the second round we'll also have midterm elections in Mexico in June, we'll see the indication of how well the anti-establishment president Lopez Obrador is doing. He is also one of the deniers of the severity of the pandemic and also one of the rare leaders who decided not to pull out the fiscal bazooka and actually was quite restrained while all other countries in the region have provided huge support both in terms of fiscal and monetary policy to the country. So we'll see what the voters will have to say about that.
And maybe one last thing which we can see across the countries. Clearly the countries have spent a lot last year to offset the impact of the pandemic - someone will have to pay the bill. Debate is ongoing how the fiscals can be put back in order, one common theme we see across the region is the willingness to tax the rich, which is not necessarily a problem for a region which is famous for its high income inequality, but we have seen that Chile and Mexico they already propose to introduce taxes based on individuals net worth but only to really high net worth individuals. Colombia is preparing a fiscal package which will also include taxes on the rich, in Uruguay the opposition has proposed such a measure and Argentina and Bolivia, and the region have already approved those. So it will be interesting to see how that plays out and what additional measures will the governments find to please the population.
Cherry: I wonder if we could bring all that together now and just talk a little bit about how optimistic you feel about, you know, the next 12 months in Latin America - Brunella, can I put that to you first?
Brunella: Sure I can give some brief comments with the angle of the equity side. So I think one important aspect to consider when we talk about outlook for the next 12 months is really how well the rollout of vaccination is conducted in the region and how the economies can really see it through this pandemic, so that's quite crucial really for businesses to return to their activities day to day. But I would say that besides that, what we have seen on the ground and talking to companies is, many businesses actually have over delivered in terms of managing their balance sheets, showing up liquidity and being quite quick to react to make the businesses leaner and more efficient to be able to operate under significant stress and more difficult environment. So I would say that if we do see an outlook for economic recovery really kicking in, there is quite good reasons to believe that earnings growth potential are very powerful and aside from that what we see in the region as well is that valuations are quite cheap when compared to their historical levels but also comparing to emerging markets and global equities as a whole, so there is I would say quite good opportunities there if this earning story really kicks in and also in terms of out performance or really just returning to the levels of valuations that we've seen in the past, there is quite good reasons to be optimistic for the next 12 months in the Latin Region.
Cherry: Great and Viktor same question to you if I may
Viktor: Yeah, I'll touch upon valuations first because we have seen a significant rise in yields across the entire region - which is probably correct in a sense that it reflects the end of the rate cutting cycles we have seen and also the start of the monetary posing tightening in some countries, but also probably the weaker fiscal position of the countries also contributed to that increase in the yields, because that obviously means increased government bond supply on the primary markets. So long yields are now looking quite attractive, but we might need to wait for inflation price to peak in the region before seeing a better performance from the bond markets.
And more on the macro side, I mean the region has once again proven its resilience in the face of a quite huge external shock. I mean the region has been through a few of these shocks over the past two, three decades and has always been able to stand up and continue to develop. I think it will be the same this time around as well furthermore we have seen quite a decent improvement in external balances across the board. If you look at the current commodity environment, it is quite favourable, so we have to see how will the region cope with the need to improve fiscal balances and restore growth. I’m hopeful that, by the back end of this year most of the pandemic will be behind us. As Brunella mentioned, the rollout of the vaccinations will be quite important in assessing how fast can this recovery happen and once it's done, probably we can focus back again to the structural reforms and the region will have a chance to reach its potential.
Cherry: Great thank you Victor and Brunella for those insights today. You can find out more about the trust at www.latamincome.co.uk, and please do look out for future episodes and once again, thank you so much to everyone for joining us.