BlackRock Latin American Investment Trust plc (LON:BRLA) is the topic of conversation when Edison Investment Research’s Managing Director Rob Murphy caught up with DirectorsTalk for an exclusive interview.
Q1: I wanted you to talk to you today about Latin America as an area for investing, why would you say investors should be looking at Latin America right now?
A1: That’s a good question. We recently put out a note on a Latin American focus trust called ‘Finding opportunities across the region’ and that was talking about BlackRock Latin American Investment Trust.
When we talk about Latin America, it’s really dominated by three countries, Brazil is 64% of the index, Mexico is 21 and Chile is 7 so even Brazil and Mexico really dominating the index . These countries, in general, suffer quite heavily from COVID and as a result, Latin American equities are underperformed maybe by around 30% since the earlier parts of the year. That’s led to a big discount relative to other markets so the forward PE of Latin America is now only 13.4 times and that’s a discount of 31% to global markets. The average of Latin America is a 14% discount so you can see there’s quite a big valuation gap opening up at the moment so you could argue, this looks like an interesting entry point.
If you look at some of the fundamentals, if we take Brazil – the largest country – inflation is under control there now, they have reduced interest rates to around 2%, and there is a program of reforms over the next few years which include things like sanitation, administration, infrastructure partnerships and potentially tax reforms. They’ve also been keeping spending in check, they’ve kept public sector pay down and that should support the currency, which is the Real in Brazil.
The other thing to look at as well is China, we had some good numbers actually out today showing China’s growth continuing to pick up and China, as we know, is a big consumer of commodities and Brazil is obviously a large producer of commodities. So, you’re actually getting exposure to the recovery of China through Latin America as well and we’re seeing that in the revisions to GDP in Brazil where the recovery is coming through a bit faster than expected and growth rates, although negative, have been revised upwards.
Q2: So, what is BRLA’s approach to invest in Latin America?
A2: BRLA is being co-managed by Sam Vecht and Ed Kuczma from the BlackRock Emerging Markets and LatAm equities team and the aim of that is to generate long term capital growth and an attractive total return. It’s actually the only pure equity investment trust that focuses on Latin America as the nearest peer actually also has quite a significant bond allocation.
The process that BRLA is really a very bottom up process so looking at the stock specifics but with a macro overlay and that’s leads to a relatively high conviction portfolio of about 45 stocks and they look for good long term growth prospects, strong cash flow, good balance sheets, good management and all at a reasonable valuation. So, they’re not necessarily looking for the cheapest stocks out there but they want to make sure that they get decent upside in the stocks that they choose. They ESG as a key part of their investment process as well.
In terms of the macro side so the things they look at there are what they call the four C’s. So, they look at consumption which will tend to benefit from lower interest rates, GDP recovery, commodities, again that’s driven by China and GDP, currencies affected by economic reforms and potentially dollar weakness and credit. So, is there liquidity in the economies and we have seen actually reasonably good liquidity injection across Latin America.
In terms of the actual stock themes they look at, they have structural growth areas which would include e-commerce, healthcare, software companies, benefits of restructuring and reforms such as state owned enterprises like Petrobras and bond proxies at a reasonable valuation, which again would benefit from falling interest rates and companies that have a high yield but also with low leverage that can generate a good income.
They tend to be quite active as well with their use of gearing in the trust so they’re view of a neutral gearing would be about 5%, currently they’re running at about 8 and they they’re quite active in moving that around to take advantage of opportunities. To give you an idea, the gearing in February was around 5% and that went up to 10% in April so they took advantage of the weaker markets.
In terms of currencies, it’s quite interesting that typically Brazil’s equity market can actually go up by 50% also on average during periods of extended dollar weakness
So, they have quite an interesting outlook at the moment for the trust.
Q3: Now, as you said, it’s run by two ages, Edward, and Sam and it’s a good time now so what have they been doing to change the portfolio recently?
A3: Well, they’re what they describe as cautiously optimistic currently, you are seeing the COVID curves beginning to flatten and we’re seeing the growth in China coming through.
What they’ve done over the last 12 months is they’ve significantly increased their weightings in consumer discretionary and materials companies and all other sectors actually have been reduced especially financials, consumer staples, and also energy to some degree. As I mentioned just before, they increased their gearing in April to 10% from only 5 back in February.
The kind of companies they’re buying so as an example:
- Locamerica which is a corporate fleet hire business, that should benefit from GDP growth as companies recover and are able to spend more on growing their businesses.
- Rumo, the railroad company, that will benefit from again, transportation of commodities through to the ports.
- Afya which is a medical school education business that actually Brazil has a low number of doctors relatively so that positions them quite well for longer term growth.
- Via Varejo which is a retailer but that’s shifting its business online quite quickly
It’s also worth mentioning there’s quite a strong IPO pipeline in Brazil, especially at the moment and they bought into Vasta Platform, which is a primary, secondary educational technology provider.
The things they’ve sold, I think clearly things like healthcare companies which have become quite expensive and a food manufacturer where you’ve seen sort of rising wheat prices, pressure margins.
So overall they’ve been moving the portfolio, I would say to, more recovery and some longer term growth themes.
Q4: How would you say the Blackrock Latin American Investment Trust is positioned and who might it appeal to?
A4: Well, the trust is definitely positioned for a global recovery as we get through to next year and hopefully COVID continues to come under control. Latin America is a big producer of commodities and demand for those will grow as economies recover.
It’s also positioned to some longer term growth themes, as I mentioned, and so you get a sort of a combination there, we know that they’re looking for quality businesses so they have strong controls over the risk of the portfolio as well.
The sort of people that would appeal to, investors, if you’re looking for a good investment which will benefit from a turnaround in global economy, continued growth in China but also in emerging markets, some of the developments of many of these e-commerce and healthcare businesses which have a lot of potential to grow in the future.
It’s also worth saying actually that the trust pays a 1.25% dividend based on NAV which is sort of 5% annualised and that dividend is strongly covered by distributable reserves of $150 million. So, if you annualise that dividend, it’s something like 17 times covered by those reserves so you actually get quite a nice income as well as the potential for capital growth.