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Why Investors Should Consider Peru

Tuesday - 5/7/2013, 5:33pm  ET

Peru is one of the fastest growing economies in Latin America. Its economy has been expanding at a startling speed, with an annual average GDP growth rate of 5% over the last two decades. The staggering rate of economic growth has been fueled by a commodities boom and a significant influx of foreign direct investment into the country´s commodities sector. This has generated solid tax and royalty revenues that have underpinned a staggering growth in public investment. It has also fueled the expansion of Peru´s middle-class, causing domestic consumption for a wide range of consumer goods to take off. In this article I will explain why and how investors can take advantage of this extraordinary growth story.

Macro-economic Indicators Bode Well For Strong Future Growth

Peru´s macro-economic indicators tell us a story that not only indicates a history off extraordinary growth, but also shows that growth is set to continue for the immediate future. Over the last decade Peru´s average annual GDP growth rate has been over 7%, and as the chart below illustrates even during the global financial crisis its economy grew at a staggering rate of over 8%.

Source data: Banco Central de Reserva del Peru.

This economic boom has also seen savings and investment surge over the last decade, with national savings growing by almost 7% to now be 23% of GDP, and investment has surged by almost 9% to now be around 27% of GDP. Furthermore, as the chart below illustrates, the majority of that growth in investment has been from the private sector.

Source data: Banco Central de Reserva del Peru.

This indicates that the majority of that investment is coming from the creation of new businesses and the expansion of existing businesses, creating new jobs and further driving domestic consumption.

Capital expenditure has almost doubled over the same period to account for 5.7% of GDP, and the majority of these capital expenditures are made up of public investment.

Source data: Banco Central de Reserva del Peru.

This rapid growth in investment and capital expenditure can be attributed to the country´s commodities boom and the stupendous increase in foreign direct investment. Over the last decade foreign direct investment has exploded almost nine fold to just over $12 billion in 2012, as the chart below shows, which in itself was a 51% increase year-over-year.

                           Peru Net Foreign Direct Investment

Source: United Nations Economic Commission for Latin America and the Caribbean.

All of these factors are stimulating domestic consumption, the expansion of Peru´s middle-class and the demand for credit, further fueling Peru´s economic boom. This leaves investors with the question of how to access this economic miracle without investing directly in Peru via the local stock exchange the Bolsa de Valores de Lima.

Investment Opportunities

There are currently two Peruvian companies that have ADRs listed on the NYSE: Compania de Minas Buenaventura and Credicorp Limited . Investors can also gain broad exposure to Peru through a Peruvian ETF, the iShares MSCI All Peru Capped Index .

Buenaventura is a gold and silver miner that operates in Peru, and is a partner with Newmont Mining Corporation in the Conga and the Yanacocha mining projects in the country. The company recently hit a new 52 week low on the back of the plunging gold price and its disappointing first quarter 2013 results, which saw the company miss analyst estimates.  Earnings per share fell by 26% quarter over quarter and 51% year over year to 40 cents.

However, the company does have a relatively low cash operating cost per ounce. This ranges from $341 to $639 per ounce depending on the mine, which still makes the company quite profitable despite gold being down by 13% for the year to $1,470 per ounce.

Credicorp is the largest banking and financial services company operating in Peru, though it also has operations in Chile, Bolivia and Colombia. The company has been going from strength to strength over the last five years with net interest income, non-interest income and net income growing significantly, as the chart below illustrates.

Source data: Credicorp Financial Filings 2008 to 2012

The bank has also embarked on an aggressive expansion into investment banking, seeing it acquire controlling interests in Chilean IM Trust and Colombian stock broker Correval, giving it a strong presence in the Andean region. This has been a key driver of the bank´s strong growth in non-interest income and has diversified the bank´s income streams. Overall, I expect to see Credicorp continue to perform strongly, with both solid revenue and net income growth on the back of its recent acquisitions and the promising outlook for Peru´s economy.

The final option is the iShares MSCI All Peru Capped Index ETF, which has performed flatly for the year to date, only being up by 2%. The ETF's top three holdings are Credicorp, Southern Copper Corporation and Buenaventura. Combined, these three companies make up just over 45% of the ETF's total holdings, leaving it exposed to both the downward pressure on gold and silver prices, as well as diminished Chinese demand for commodities and in particular copper. But with the ETF's performance having been relatively flat, it does give investors an opportunity to gain broad exposure to Peru´s stock market and the broader economy.

Bottom Line

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