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Merrill Lynch Latin America Investment Trust (MLLA) – 555p, stop loss 444p

SHARES SUMMARY

One of the best ways to jump aboard the South American – and in particular Brazilian – economic growth train. The trust has kept pace with its benchmark indices over the longer term with an enviable record.

Business:

Investment trust specialising in Brazil and Mexico

Vital stats:

Market value: £249 million

Discount to NAV: 2%

1-month relative strength: 7.5%

1-year relative strength: 42%

Yield for 2007: 1%

NMS: 2,000

Spread: 1.6%

Eagle-eyed readers will have noted that the Merrill Lynch Latin American Investment Trust was one of the six investment trusts recommended in last week’s cover story (‘World’s Most Exciting Markets’, Shares, 21 Feb). It is currently 72% invested in Brazil – up from 61% at the beginning of 2007.

We think Latin America – and in particular Brazil – has much further to grow both economically and in investment terms. Historically, South America was tarred with the brush of political and economic instability and a shortage of listed companies. In 2003 the value of investments listed on Latin American stock exchanges was just $93 billion. Today it is around $750 billion and rising.

Brazil is by far and away the largest country and stock market in the continent. It is also one of the world’s cheapest stock markets, on a 2007 PE of 14 falling to 11 this year. This discount of some 50% to average developing markets ratings is expected to continue shrinking rapidly over the next few years.

Last year the Bovespa (Brazil’s stock market) rocketed 72%, which is unlikely to be repeated this year but 20-30% is perfectly possible. A stunning performance by mega cap Petrobas was the main reason. The oil and gas giant, which boasts Latin America’s largest market value, soared out of sight with a 132% rise following the huge offshore oil field discovery at Tupi.

Steel and mining stocks also did well. Demand for raw materials from China and India in particular will continue to increase rapidly. Best of all, Brazil is energy self-sufficient and its economy is broadening fast with the home buying and consumer lending markets in their infancy.

Merrill Lynch Latin American is overweight in banks, real estate developers, consumer stocks and materials. Domestically generated economic growth should be substantial.

The political risks look low as the Government, though socialist, is strongly market orientated. Government spending and inflation are under control and there is a big balance of payments surplus.

Admittedly a severe US slowdown would hit BRIC country growth in the short term but a mild US recession would have little impact.

Other Latin American countries are also going great guns. Blackrock Investment Management has cut its weighting on Mexico to under 20%, due to the country’s reliance on the US, but still holds big stakes in Mexican companies such as America Movil, which is the region’s leading mobile telephone company, and Cemex, the cement giant.

Blackrock is investing more in Argentina but has cut holdings in Chile and Columbia. The sixth largest investment, Argentina-based Tenaris, is one of the world’s biggest makers of seamless pipes for the oil industry.

Since the start of 2003 Merrill Lynch Latin American’s share price has soared 817%, once you factor in reinvested dividends. Repeating that over the next five years is unlikely but investors could see the share price double by 2011, while the current 3% or so discount to net assets looks unlikely to widen much in future – especially since Blackrock can buy back shares.

Management fees were cut from 1% of NAV to 0.85% but Blackrock will collect a performance fee equal to 10% of any outperformance of NAV over the MSCI Latin American Index, capped at 1% of NAV.

Last year Merrill Lynch Latin American slightly underperformed, rising 44% against the 51% benchmark as it was underweight in Petrobas.

by: Timon Day