Handelsbanken Latinamerika Impact Tema (A1 EUR)

The quarter showed volatile returns, with particular weakness in Mexico driven by a weaker currency. Mexico is structurally well-positioned to benefit from its close proximity to the US and the fact that the manufacturing industry is relocating to North America from primarily Asia. This contributes to an increase in formal employment, which in turn has positive spill-over effects for the economy. However, Mexico is facing several challenges in the short term, the greatest being political. The market is particularly concerned about the overwhelming election victory in the parliament by the left-wing populist party Morenas. One example of the resulting changes was seen in September when the former president, López Obrador, together with the parliament, pushed through a controversial reform of the court system. Critics believe that the reform runs the risk of weakening Mexico’s democratic system and negatively impacts the relationships with the US and Canada. At the same time, the election in the US is approaching and Mexico is often included in the political debate. However, we believe that the US’ dependency on Mexico to diversify away from Asia is significant and Mexico can benefit from this over the long term regardless of the outcome of the election. At the same time, we are seeing a cyclical slowdown in North America, which is beginning to impact Mexican companies with strong exposure to the US.

During the quarter, we increased the holding in Sabesp, the water and sanitation company in São Paulo, Brazil, when the company was privatized. The equity was sold below the market price and has continued to perform positively after the initial purchase. The company plays a key role in improving access to clean water and creating the conditions for better public health in São Paulo. Among the strongest contributors to fund returns was Weg, which continued to report strong results. The company has an interesting exposure to transformers in North America where there is currently high demand. In Brazil we also had a bid on the harbor operator Santos Brasil, with a premium of approximately 20%. The weakest contributor to returns was the Mexican bank Regional. The equity has been one of those most affected by the uncertain political situation in Mexico and an increasing number of investors have chosen to invest in banks in Brazil rather than in Mexico.