Jyske Invest Latin American Equities

Market Comments, Q4 2011

For Q4, Jyske Invest Latin American Equities gained 8.27%, underperforming the benchmark by 0.59 percentage point. In 2011 Jyske Invest Latin American Equities dropped by 19.32%, underperforming the benchmark by 0.91 percentage point.

Performance 2011

2011 was a setback for Latin American equities which had recovered fairly following the drastic downturn in 2008. It is the third time over the past ten years that Latin American equities close the year in negative territory. The equities fell by 18.40% for the year and they trade at a level which is 25.32% lower than prior to the downturn in 2008. The debt crisis in Europe, the Arab Spring and the nuclear disaster in Japan all contributed to setting the stage for the equity market. Particularly uncertainty about the European ability and willingness to solve the debt crisis was considerable. A number of political measures, economic rescue plans and good intentions had a slightly favourable effect on the sentiment but at the end of the year there was still major uncertainty about Europe’s future.

In 2011, the more defensive economies Columbia and Mexico generated the best returns in the region, with losses of 5.02% and 12.11%, respectively. At the other end of the scale are the more cyclical and commodity-heavy economies Argentina and Brazil, which recorded falls of 38.94% and 21.85%, respectively. The picture is the same for returns in the sectors with wide deviations between the best and worst performing sectors. Defensive sectors like IT (25.70%), consumer staples (3.07%) and utilities (-3.32%) yielded the best returns whereas more cyclical sectors like materials (-30.17%) and energy (-28.34%) yielded highly negative returns. The composition of the Latin American equity index, which has a large number of companies within cyclical sectors like materials and energy, is part of the explanation for the major price declines seen in 2011.

The majority of the large currencies in Latin America weakened in 2011. Brazil, Chile and Mexico’s currencies fell by 11-14% against USD, contributing significantly to the negative return for the year.

Outlook

In early 2012, the global economy is still facing a number of large challenges which may have considerable implications on the market returns in the coming year. Much depends on political measures, which means that 2012 may be unpredictable for investors. When expectations are low, there may be room for positive surprises – but it takes a shift in the global economy and the market psychology.

We assess that Latin American equities trade at attractive price levels seen in relation to the present anticipated earnings in the corporate sector. The valuation is low relative to their own track record and the global equity markets while earnings growth and the return on equity are higher than the global average. Relative to the US and Europe, the Latin American countries have low debt and high growth and the growth engine Brazil has demonstrated major determination in the struggle to pave the way for growth. 60% of Brazilian GDP derives from domestic consumption and the coming rise in minimum wages at 14% as well as the record-low unemployment are expected to keep up growth in 2012.

One of the major question marks for 2012 will be the development in commodity prices. In 2011 commodities constituted 42% of Latin America’s total exports. Thus, the region remains dependent on high prices and healthy demand, particularly from China. If this will not be the case and we will see a collapse like the one in 2008/09, the Latin American economies and equity markets will face a challenging time.

The high dependence on commodity prices leads to higher sensitivity to the economic development in China. It is estimated that a fall in Chinese GDP of 1% will result in an approximate fall of commodity prices of 5% and a similar fall in the currencies of the commodity-heavy countries.

In 2012, new presidents are to be elected in Mexico and Venezuela, which historically imply increased risk. In 2011, we saw derived turmoil in the equity markets where particularly the surprising outcome of the elections in Peru caused investors to sell their equities.

Please note

Past performance is not a reliable indicator of future results. The value of and return on your investment may fall, and you may not get back the full amount invested. Investment in small and emerging markets may prove more volatile than investment in other markets. An initial charge is usually made when you purchase and sell units. The fund may invest in instruments denominated in various currencies. You should be aware that changes in exchange rates may have an adverse effect on your investment. This may also be the case if USD is not your base currency.

Information in this text should not be regarded as investment advice, and investors should consult their own investment and tax advisers before buying or selling.