Handelsbanken Latinamerika Impact Tema (A9 SEK)

Fund performance was negative in Q2 primarily due to a weakening in the most important currencies: Brazilian real and Mexican peso. The quarter was marked by high volatility, driven mainly by political events. The Morena party won the Mexican election and received more seats than expected. As a result, the changes to the constitution now appear to be a clear possibility for the party. The market is troubled by a potential weakening of the Mexican democracy and a greater focus on power, especially with concern about judicial independence. We expect to see higher volatility in Mexico going forward, not least with the US election in the autumn. However, the actual risks are limited by the strong economic links to the US. In Brazil, the market’s confidence in the fiscal policy has decreased, and rate cuts have been pushed forward to the future as a result. We believe that the market’s pricing is too negative, although the trend is negative. Consequently, the Brazilian equity market has been marked by further outflows and high volatility, which led to negative returns.

The pharmacy chain Fragua was the strongest contributor to returns as the company continues to deliver high-quality returns. The Chilian pension management company Habitat also contributed positively after political risks were priced out of the equity and the focus has returned to the strong fundamentals. On the negative side, the Mexican banks lagged due to market concerns about additional taxes and a weaker growth after the election. The short-term effects of the macro climate means that rate cuts are being pushed forward, which is positive for the banks’ results. At the same time, we believe that the effects of a possible tax reform are relatively marginal. What is more worrying is a slowdown to the economy going forward. As a result, we chose to only make minor adjustments to the positions.

We slightly increased the investments in Peru through InRetail, which owns pharmacies as well as shopping centers and supermarkets. We significantly decreased the exposure to Fragua after strong returns. The Argentinian bank Galicia is a new holding in the portfolio. The initial effects of the political shift in Argentina are presumably priced in. The rapid decline to inflation and the stronger than expected support for the president led us to add the equity to the portfolio. The next step for the bank is to resume lending. For this to be possible, the economy needs to gain momentum and inflation needs to continue to slow down, which is probable due to the massive austerity measures that have been undertaken. We view Galicia as a leader in a market that is essentially devoid of credit products.