Excel Latin America Fund Commentary

As of November 30, 2011

November started off in a “risk-averse” mood given the absence of any convincing action in terms of solving Europe’s sovereign debt problems.  Market concerns shifted from Greece to Spain, Italy, and France, before finally affecting the German bond market.  Nonetheless, the coordinated announcement - on the part of six Central banks led by the U.S. FED - to cut the cost of USD liquidity swap lines and ease dollar funding across the globe provided some relief in the last day of the month. In addition, on the same day, the Chinese government (PBOC) reduced reserve requirements for the first time in three years in response to the risk of a sharp decline in the country’s economic growth. These coordinated measures by worldwide policy makers prompted a pronounced rally in the markets.

In this context of a slowing economy, which was expected by the Central Bank, combined with the uncertainty of external market conditions, we believe that interest rates may be reduced. We believe that interest rates will be cut by another 50 bps at the next central bank meeting in January, bringing the rate to 10.5%. The rate was previously reduced to 11% at the November bank meeting and we believe that it is possible to see further cuts in March 2012.  Any acceleration in the pace of interest rate cuts is dependent upon an increase in the level of risk aversion due to the problems in Europe; causing instability in the market and resulting in a further round of downward revisions in the growth forecasts.  October’s inflation was also lower than expected. 

Fund Positioning
We continue to remain overweight consumer discretionary stocks throughout the region, but we remain underweight materials and global cyclicals given our concerns that Europe’s growth profile will remain under pressure for the foreseeable future.  We remain overweight Brazil and underweight Mexico, but have added to Chile as the significant fall in the index has presented a rare entry point for that market. Chile now trades one standard deviation below it historic valuation and the market is now cheaper than Mexico, something we have not seen in the past.

Following our recent due diligence trip to Brazil, we are positive about the outlook on Latin America.  It is still showing signs of an improving and strengthening consumer base, with little evidence of rising inflation or stress in the overall economy.

Market & Fund Outlook
During the last few of weeks in November, we noticed Latin policy makers, particularly in Brazil, intensifying their efforts in favor of economic growth through incremental measures and easing monetary policy.  The government eliminated the 2% IOF tax on foreign (Bovespa market) and private equity investments as well as the 6% IOF on long-term infrastructure-related corporate bonds.

Markets continue to gyrate viciously between risk on and risk off, as the European sovereign debt saga plays out. We believe this is distracting markets from fully appreciating the underlying strength and resilience of most Latin economies. Generally speaking, Latin America is much better off than it was in 2008, and we believe when an endgame in Europe is finally achieved and markets stabilize, flows should return to emerging markets and Latin America.  From a medium-to-longer term perspective, we think that the Latin region lacks any structural/systemic debt or fiscal problem. When combined with greater prospects for secular growth, it should result in greater global flows into the region

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