This Overlooked Emerging Market ETF Might Surprise You

Emerging markets like China, Brazil and India instantly capture attention these days. But investors should keep in mind that they’re not the only ones out there. It means little whether or not a country has hit Wall Street’s radar yet. For instance, Peru – South America’s fastest-growing large economy – has excellent economic prospects with reasonable valuation levels. Granted, that wasn’t true twenty years ago when Peru struggled with raging hyperinflation and violent attacks by communist guerrilla groups. But a lot has changed since then, and it’s set to grow 7% this year. Most economists can’t help but notice the difference… and you should too.

Peru’s Commodity Advantage

Peru can trace its mining ties back to a time before the Inca Empire  And that same tradition has helped push it into a successful economy today.

Similarly, much of its future success relies on its exports of gold, copper and the like. Fortunately, global mining companies can’t seem to get enough of any of those.

In all, they have $41 billion in investments planned there over the next decade. That should quadruple Peru’s copper exports, putting it neck-and-neck with Chile, the world’s biggest producer right now.

Along with mining, the country has other factors going for it, such as agriculture. In the past decade, such exports have surged from $300 million to $2.5 billion.

  • Peru exports the world’s largest amount of asparagus. 
  • The country produces the most specialty coffees, paprika and organic bananas. 
  • It also reaps significant amounts of cocoa, sugar, artichokes, avocados and mangos.

Right now, that sector only accounts for 8.3% of GDP, though it employs a third of the workforce. But it should grow fast with the introduction of superior farming methods such as drip irrigation.

With strong sales in the first half of the year, revenue rose 19% over the same time in 2009 to $1.37 billion. That highlights Peru’s potential in the global agricultural market.

This Economy Has More than Pretty Rocks and Tasty Treats

Soaring commodity prices have turbo-charged Peru’s growth rate lately, sending it soaring 12% in June compared to the previous year. But this boom looks sustainable regardless.

  • Peru keeps expanding into sectors as diverse as designer clothes. That – and free trade deals made with countries like the U.S. and China – has helped its trade triple what it did ten years ago. 
  • The country has thrown open its doors to foreign investors such as mining companies. Private investments are growing 14% per year, greatly aiding Peru’s $140 billion economy. 
  • Domestic consumption continues upward as well, rising an annual 6%, while poverty has marked a dramatic decline over the past decade. Less than 30% of Peruvians now live on less than $4 a day, a significant decrease from the previous norm of 49%.

Yes, nominal per capita GDP stands at only $4,000-$4,500, about half that of Brazil and Argentina. But most economists expect it to match its neighbors over the next few years.

Inflation is manageable, edging up to 2.3% annually. And taking that factor into consideration, its economy is now almost three times what it was two decades ago.

Peru has a regionally high savings rate of 22%. Its current account deficit is less than 1% of GDP while public debt amounts to just 25% of it and consumer debt and mortgages are a mere 8%.

It should come as no surprise then that the country’s debt is rated investment grade. Also, credit default swaps on Peruvian sovereign debt are tighter than for South Korea or Israel, and half that of Italy and Spain.

A Strong ETF for a Strong Emerging Market

Until last year, investors could only buy into Peru through companies like gold miner Compania de Minas Buenaventura ADR (NYSE: BVN); copper miner Southern Copper (NYSE: SCCO); or the financial, Credicorp ADR (NYSE: BAP).

But iShares MSCI All Peru Capped Index Fund (NYSE:EPU) now offers a new way. It has large positions in BVN and BAP, and smaller holdings in other mining and financial stocks. Over 15% of the fund goes to other sectors such as energy, utilities, industrials and consumer staples including Alicorp.

Peru has a lot going for it, with close business ties to Asia’s commodity craving markets. It also features a more open economy than many other South American countries, even if it does lack Brazil’s huge domestic base.

Dominque Strauss-Kahn, head of the International Monetary Fund, may have described it best when he called Peru an example of “how to reach a fast track of growth and poverty reduction by carrying out strong economy policies.”

With strong economic policy fostering strong growth, Peru looks well worth investing in.

Good investing,

by Tony D’Altorio, Investment U Research

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