Fund manager commentary
31 March 2025
Comments from the Portfolio Managers
Please note that the commentary below includes historic information in respect of the performance of portfolio investments, index performance data and the Company’s NAV and share performance.
The figures shown relate to past performance. Past Performance is not a reliable indicator of current or future results.
The Company’s NAV rose by +4.1% in March, outperforming the benchmark, MSCI Emerging Markets Latin America Index, which returned +2.3% on a net basis over the same period. All performance figures are in sterling terms with dividends reinvested.1
Emerging Markets rose 0.6% in March outperforming Developed Markets by over 5%, the highest margin since November 2022. Performance in Latin America was primarily driven by the returns seen in Brazil (6.5% month on month), Peru (4.9%) and Chile (4.2%).
At the portfolio level, security selection in Brazil and Mexico were the largest contributors to performance during the month. On the other hand, an off-benchmark exposure to Argentinian IT stock detracted.
From a security lens, overweight positions to a collection of Brazilian real estate developers was the largest contributor to returns over the month. Both EZ Tec and Cyrela performed well after delivering strong fourth quarter 2024 results, where the latter reported net revenues ahead of consensus estimates. B3, the Brazilian stock exchange, also contributed. The stock bounced following a favourable ruling from Brazil's Administrative Tax Appeals Board, annulling fines imposed by the Brazilian tax authorities. Our underweight position to digital banking platform provider, NU Holdings, also continued to aid relative performance during March.
On the flipside, our overweight position in IT services firm, Globant, was the worst performer over the month. The IT services sector more broadly performed poorly on the back of US growth concerns. XP, the Brazilian investment management platform, was another detractor amidst a short seller report accusing the company of financial misconduct. We believe the allegations to be unfounded and therefore currently have maintained our position. Our underweight position to JBS, a Brazilian meatpacker, also detracted. The company's share price jumped to a 5-year high following news of a potential listing in New York.
We made few changes to the portfolio in March. We took profits and reduced our position to Mexican miner, MAG Silver. We also reduced our exposure to B3 following strong performance. We took advantage of the global sell-off in the IT services sector to add further to our Globant position. We also added to Azzas 2154 as we believe the stock was oversold.
Mexico remains the largest portfolio overweight as of March end, while Peru is the largest underweight.
Outlook
With Donald Trump securing a second term, there is potential for an acceleration in the already shifting geopolitical landscape. The President has been clear on his “America First” policy since his inauguration, which in our view is supportive of our “World in 3” narrative where we see a world splitting into three groups: those aligned with China, those aligned with the US and the rest (neutrals). We believe that neutral countries, many of which are in Latin America, will continue to benefit from increased geopolitical polarization through increased FDI (Foreign Direct Investment) as new alliances are forged.
Meanwhile, at a macroeconomic level, the Brazilian Real, which declined by more than 20% in 2024, has made a broad range of Brazilian exports much more competitive. This, together with higher interest rates, might lead to a decline in economic activity, less pressure on inflation and thus lower interest rates down the line. This in turn should lift the multiples of equities. Given cheap valuations, we also see the potential for share buybacks supporting the market in 2025. As such, we see several bottom-up opportunities in domestic Brazil, focusing on companies with lower leverage and stronger earnings outlook.
Due to the volatility Mexico faced in 2024, the Mexican central bank had been relatively cautious in reducing rates. As we entered 2025, we anticipated further rate cuts, which most recently materialized in a 50 basis points cut in March, bringing the policy rate down to 9%. We see scope for further rate cuts in 2025, which should support asset price performance.
Furthermore, despite the claims of the media, we do not see a major change in the secular trend of nearshoring of supply chains, as Mexico will remain a much cheaper location to manufacture than the United States. Mexico therefore remains our biggest overweight in the fund.
The portfolio is underweight the rest of Latin America to fund these high conviction positions in Brazil and Mexico.
1Source: BlackRock as at 31 March 2025.
Source: Unless otherwise stated all data is sourced from BlackRock as at 31 March 2025.
Any opinions or forecasts represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events or a guarantee of future results.
This information should not be relied upon by the reader as research, investment advice or a recommendation.
Risk: Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.
