The Liontrust Latin America Fund returned -8.9% during the fourth quarter of 2021, compared with a return of -3.1% for the MSCI EM Latin America Index and the IA Latin America return of-5.4% (comparator benchmarks)*.
Latin American markets had a weak end to 2021 as the pandemic continued to weigh on activity, while monetary policy was tightened across the region in response to higher inflation. Negative performance was exacerbated by political developments as Peru and Chile elected left wing presidents. Mexico rounded off a strong year by rising a further 5% in the fourth quarter and taking gains for the year to 21%.
The weakness in equity markets stands in stark contrast to the positive trend seen in earnings revisions. Earnings estimates rose materially over the course of the year, up 43% and 21% for 2021 and 2022, respectively. The resultant derating has now taken the MSCI Latin America Index valuation to just 8x forward earnings, a 30% discount to the broader emerging markets to which it has historically traded at a small premium. It also doesn’t seem to reflect the higher levels of profitability, with the MSCI Latin America return on equity expected to remain above 20% over the next couple of years compared with 13-14% for emerging markets.
There is clearly a lot of negativity priced into regional equities. Primary concerns include an increasingly hawkish Federal Reserve, question marks over the trajectory of growth in China following, in particular, the pressure being applied to the real estate sector, tighter fiscal and monetary policy in the face of high levels of inflation, and what a political return to the left means for economic growth across the region. Despite this challenging backdrop, positive catalysts could take the form of evidence that the world can finally emerge from the pandemic, an easing of supply chain strains, stronger growth in China, and peaking in local and US inflation.
The Liontrust Latin America Fund returned -8.8% during the fourth quarter. From a stock perspective, the most significant detractors to performance over the quarter were Clear Sale, Pagseguro Digital and Sendas Distribuidora. From a regional standpoint, performance was hindered by our mid cap holdings in Brazil which suffered from a deterioration in the economic outlook for 2022 and outflows from equities as the higher yields available in fixed income markets became more attractive. These companies continue to generate returns well in excess of their cost of capital, compounding value for shareholders.
Discrete years' performance (%), to previous quarter-end:
|
|
Dec-21 |
Dec-20 |
Dec-19 |
Dec-18 |
Dec-17 |
|
Liontrust Latin America C Acc GBP |
-16.1% |
-18.1% |
23.2% |
3.8% |
18.6% |
|
MSCI EM Latin America |
-7.2% |
-16.5% |
12.9% |
-0.8% |
13.0% |
|
IA Latin America |
-11.5% |
-14.9% |
15.4% |
-3.3% |
14.0% |
|
Quartile |
4 |
4 |
1 |
1 |
1 |
*Source: FE Analytics as at 31.12.21.
**Source: FE Analytics as at 31.12.21. Quartile rankings generated on 07.01.22
Key Risks
