The Colombian Bull Is Bucking The Downtrend (GXG, EEM, CIB, EC, AND, ECH)
Joseph Hogue: Despite the sluggish global picture and the trend in rate cuts from most central banks,Colombia’s central bank raised rates recently — the only country in Latin America to do so — on continued strong domestic growth and inflationary expectations.
The Colombian central bank raised the overnight lending rate by 25 basis points to 4.75%, and policy makers followed the rate increase with a note saying that rapid loan growth and a strong housing market was contributing to “very dynamic” internal demand.
Strength in internal demand is imperative these days as emerging markets watch their exports to Europe and the United States decrease among lackluster growth and mounting debt problems.
Colombia saw its debt upgraded to investment grade this year from all three major credit rating agencies on increased macroeconomic policy credibility, strong external liquidity and a moderating external debt picture. The upgrades have helped to maintain record flows in foreign direct investment despite a general flight from global risk.
The impetus behind the central bank’s tightening move was to rein in inflation from an annualized pace of 4.02% in October to the bank’s target of 2% to 4%. The general economy is widely expected to grow by 6% this year — the fastest in the region behind Peru.
Foreign investors are allowed to set up accounts and buy local stocks through one of the brokerage houses listed on the main exchange’s website, but an easier route may be through one of the exchange-traded funds or ADRs with exposure to the market.
The Global X FTSE Colombia 20 (NYSEARCA:GXG) is the most liquid option available to investors. It reflects the performance of the 20 most liquid equities in the Colombian market. The fund is not well diversified across sectors but reflects the general weighting and liquidity of the Colombian market with large companies in financials and energy.
Sector weightings within the fund are: financials (40.0%), energy (17.6%), industrials (10.6%), utilities (9.5%), materials (8.5%) and consumer goods & services (12.1%).
GXG has lost 15.1% over the last 12 months compared to a loss of 15.6% for the iShares MSCI Emerging Markets Fund (NYSEARCA:EEM) and relatively ft performance for the S&P 500.
Despite the steep selloff, the stocks in the fund still have an average price of about 18.0 times earnings.
American Depository Receipts for Colombian companies are in extremely short supply. Only two companies are listed on the NYSE: Bancolombia (NYSE:CIB) and Ecopetrol (NYSE:EC) with several other shares traded over the counter.
Bancolombia is the largest commercial bank in Colombia and one of the largest in Latin America, with a market cap of over $11.0 billion. It pays a dividend yield of 2.3% and has lost 4.6% over the last year.
With a market cap of $87 billion, Ecopetrol is one of the four largest oil companies in Latin America and pays a dividend yield of 5.1%. The shares have gained 3.3% over the past year. Ecopetrol produces about 60% of the country’s oil output, which has grown 50% since 2006.
The government announced May 5 that it would seek to sell 10% of its ownership stake — currently 90% of the company — to help pay for damages from severe rains this year.
Though investing in the over-the-counter markets may be unfamiliar to most retail investors, they can often present good opportunities into relatively neglected companies for those willing to take a long-term view. In the short term, Colombia’s OTC stocks are currently illiquid at best, so traders will need to be careful.
Grupo Nutresa (GCHOY) is Colombia’s largest food producer with $2.2 billion in revenue in 2010. The company is aggressively expanding its international business with market cap increasing by a factor of 25 times in the ten years to 2010 to $6 billion.
Cementos Argos (CMTOY) is the leader in the Colombian cement industry with approximately 51% of the market and the fourth largest in Latin America.
The Global X FTSE Andean 40 (NYSEARCA:AND) has been created to take advantage of the regional integration in the stock markets of Chile (NYSEARCA:ECH), Colombia and Peru. The fund holds the 40 most liquid stocks traded on the three exchanges with country weights of Chile (51.0%), Colombia (33.4%) and Peru (15.5%).
Sector exposure also mimics the integrated exchange, though with some tracking risk, with: materials (26.4%), financials (24.3%), consumer goods (12.6%), utilities (12.4%), energy (12.0%) and industrials (10.2%).
Besides quick diversification, the fund provides access to many of the companies not traded through ADRs. Investors looking for increased exposure to Colombia may want to invest in both the Andean and the Colombian fund. A 50/50 split between the two funds would have a 66.7% exposure to Colombia but would also provide more diversification across sectors than a singular investment in GXG on its own.
With the second-strongest economic growth forecasts in the region and billionaire real estate investor Sam Zell calling Colombia “the next best Latin American market,” investors cannot afford to ignore the small Andean country within their emerging market portfolio.
While it does not command the attention of China or Brazil within the press,Colombia should perform relatively well given strong internal demand and a favorable trade climate.
Written By Joseph Hogue From Emerging Money Disclosure: Long position in AND
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.