Lou Gerken
March 6, 2008
Dear Friends & Co-investors,
January was one of the most difficult months in recent years for all stock markets and the emerging markets were the hardest hit. We witnessed high levels of volatility during the month where the MSCI Latam index fell -10.8% thru Jan. 21 and then rebounded to close -6.4%. Reflecting the volatile markets, we conservatively positioned our portfolio during the month with a high net exposure and as such our NAV was -0.65%. While not pleased to show a down month, in context the average Latam hedge fund was -0.9% for the period.
The correction was mainly caused by continued deterioration of the US credit crisis and investor continued worries that the sub-prime turmoil may spread into other consumer credits such as credit card and car loans disrupting economic activities in every aspect.
The Latam stock markets have corrected substantially from their Oct.’07 peaks in the range of 25%. A by-product is that valuations are much more attractive at current levels. MSCI Latam shares are now trading at 12X 2008 PER with EPS growth of 15-20%. We believe that the Mexican and Brazilian economies are significantly stronger than in previous crises so while we expect volatile conditions to persist internal factors such as increased government spending in infrastructure in Mexico and solid domestic demand in Brazil will make them attractive investment opportunities irrespective of the U.S. slowdown. This will give support to the Latam stock markets, where in fact the MSCI Latam Index has already rebounded +10.49% since the Jan. 31 close and now off only -1.49% from the Oct. 29, 2007 all time high (attachment - sg).
To help put the current market setback into perspective, I attach a 20-year chart for the S&P 500 (Events vs. Indices). As is evident, despite the highlighted points of turmoil which were accentuated by the “Dotcom Bust” in 2000, there has been a continuum of significant progress. Similarly, notwithstanding today’s pessimism it is our view that the most recent/current setbacks are not indications of a bear market, rather a bull market correction. We have been closely monitoring developments in the global markets and believe it is a good buying opportunity as we see signs of stabilization in the US market. Although beginning the year in “troubled waters” our objective remains to deliver a 20%+ return (net) for 2008.
Attachments: Events vs Indices (pdf) / Performance Chart (pdf)
Best,
Lou Gerken
|
