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Aberdeen Latin American Income dips into revenue reserves

Aberdeen Latin American Income dips into revenue reserves – Aberdeen Latin American Income (ALAI) has posted its annual results for the year to 31 August 2021. During the period its NAV total return was 17.4% while its share price total return was 20.9%. This compares with a benchmark return of 17.5%.

The earnings per share for the year were 2.66p, reflecting a 20% increase over 2020 following the severe impact of the pandemic on dividend payouts in the prior year. ALAI has continued to pay four interim dividends of 0.875p per share, maintaining the total level of dividends for the year at 3.5p per share. To finance the dividends during the year, the company paid £480,000 from its revenue reserve and carries forward £1,482,000. After accounting for the fourth interim dividend which was paid after the year end the revenue reserve held the equivalent of over 0.49x of a full year’s current distribution.

Statement from the chair:

More than one year on, Covid-19 remains the primary determinant of asset prices. Whereas efforts to contain infections and boost economic stimulus were priorities earlier in the pandemic, investors’ subsequent focus turned to the brightening prospects for economies and corporate earnings. This was largely triggered by the commencement of vaccination programs, which enabled governments worldwide to loosen restrictions and reopen more sectors. Unfortunately, Latin America lagged the rest of the world in this respect as logistical constraints hindered the initial vaccine rollout in several countries. Nonetheless, I am heartened to note that inoculation rates have broadly picked up, alongside a concomitant decline in caseloads.

Overall, a combination of improving vaccination rates, easing curbs and the impact of prior stimulus efforts contributed to a strengthening economic recovery. The rosier outlook globally provided added stimulus, underpinning a robust rally in commodity prices and benefiting the region’s resource exporters. Encouragingly, prospects still appear upbeat, with the International Monetary Fund recently upgrading its full-year GDP growth forecasts for two key markets, Brazil and Mexico.

However, a less welcome consequence of the better than expected rebound was the return of inflation. This was driven by rising food and energy prices, volatile currencies, together with global supply-chain disruptions. Central banks, wary of the price pressures that have long impacted the region, wasted little time in reverting to a tighter policy stance. In this regard, Brazil was the most aggressive, lifting its benchmark rate five times in 2021, from 2% to 6.25%. Mexico, Chile and Peru also raised borrowing costs, with more increases expected. The better news is that, with interest rates near record lows due to the pandemic, there is room for future hikes. These proactive moves, it is hoped, will reduce inflation to more sustainable levels.

Meanwhile, fresh worries in domestic politics added some unease. This was perhaps most evident in Colombia, where large-scale protests erupted violently against a government plan to raise taxes on food and other essentials. The extended unrest sparked a broad-based sell off in the domestic market. Investors also trimmed their exposures to Peru after leftist candidate Pedro Castillo unexpectedly won the presidential election. There were fears about his populist platform, although he appears to have moderated his stance since taking office. It was a similar story in Chile, where the election of a left-leaning assembly to rewrite the constitution raised worries among foreign investors about more radical proposals. In Brazil, heightened tensions between the president and the supreme court amid persistent concern over the country’s strained fiscal position hampered the market’s gains. By comparison, things appeared calmer in Mexico. In fact, markets there reacted well after voters denied the ruling party a supermajority in mid-term elections, an outcome that bolstered checks and balances against President Andres Manuel Lopez Obrador’s government.

Despite these uncertainties, the picture at the company level still looks fairly promising. Crucially, corporate profits largely surpassed forecasts across most sectors lending support to equity prices. Furthermore, new opportunities are emerging that make the investment landscape appear attractive to our Manager. For example, more businesses are now catering to the growing adoption of digital solutions and services, a direct result of the pandemic and associated lockdowns. Another emerging segment is tapping into the global “green” push, encompassing a diverse group of sectors, from renewable power generation to electric vehicles.

While there is certainly an attractive array of opportunities, your Manager’s discerning eye and active approach remains important, especially with regards to risk mitigation. This is because there is still significant variation in the quality of companies across the region and unexpected developments can suddenly sap investor confidence, particularly on the governance front. A recent example was Geopark, an oil and gas explorer held in your Company’s portfolio. The unrest in Colombia hurt the company’s share price, but this was exacerbated by a board level dispute, which further weighed down on it. Your Manager very quickly engaged with the company to gain a deeper understanding of the issues. Having extracted some reassurance from management, your Manager concluded that the impact of these events did not fundamentally impair the case for investing in the company and retained the portfolio’s exposure. Nonetheless, it continues to remain vigilant.

ALAI : Aberdeen Latin American Income dips into revenue reserves

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