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Now Is the Time to Invest in Colombia

Tuesday - 5/7/2013, 5:44pm  ET

Over the last decade Colombia has been one of Latin America´s economic miracles, with the country going from teetering on the edge of becoming a failed state to becoming the region´s fourth largest economy and third largest oil producer. This dramatic change has not come easily, and began with the security crackdown introduced by former President Uribe in 2002 and the deregulation of the economy, while introducing an economic environment conducive to business. Just like neighboring Peru, the rapid economic growth is being driven by a commodities boom, which has seen direct foreign investment flood into the country. This has resulted in phenomenal rates of economic growth, with an annual average GDP growth rate over the last decade of almost 5%. I believe this has created opportunities for investors in an emerging market that was once considered off limits to all but the most risk tolerant investors.

Domestic Economic Indicators Continue to Improve

The Colombian economy began to slow as a result of the European financial crisis and falling Chinese demand for basic materials, which saw the country´s central bank Banco de la Republica Colombia reduce the benchmark rate as a means of stimulating the economy. In conjunction with this, the Colombian government embarked on a stimulus program through increased capital expenditure on infrastructure, public works, energy and housing in order to boost economic activity.

It would now appear that these measures are having the desired effect, with Colombia´s central bank holding the official interest rate steady at 3.25%, on the back of an improved economic outlook. This has seen GDP growth of 4% predicted for both 2013 and 2014.

As the chart below illustrates, this is lower than many of the previous years, but is still a solid rate of great of economic growth, particularly with respect to the uncertainty surrounding the global economy.

Source data: Banco de la Republica Colombia

This forecast rate of growth is also higher than that expected for many of Colombia´s Latin American peers, such as Brazil, Mexico and Uruguay, as the chart below illustrates.

Source: Standard & Poors ‘Latin America's Economic Growth Should Pick Up In 2013-2014 But Remain South of Prerecession Levels'

This indicates the tremendous growth opportunities that exist for investors in Colombia, much of which is being driven by tremendous inflows of direct foreign investment into the country. Foreign direct investment in Colombia in 2012 reached a new high, totaling $12 billion, as the chart below illustrates, which was a 140% increase on 2011 and a 50% increase on the best year prior 2008.

                                            Colombia Foreign Direct Investment

Source: United Nations Commission or Latin America and the Caribbean

This significant growth in foreign direct investment is not only financing the country´s commodities boom, but it is seeing investments in a range of businesses as companies in developed markets seek to send administrative and call center operations to Colombia as a means of reducing costs. This is directly contributing to the expansion of Colombia´s middle-class and driving an explosion in domestic consumption.

This has also seen the Colombian stock exchange, the Bolsa de Valores de Colombia, explode in value, with the IGBC index rising almost eightfold in value since 2003.

Source data: Banco de la Republica Colombia

Much of this growth has been fueled by the increasing value of major Colombian companies, such as Ecopetrol , Bancolombia , Banco Davivienda and Exito.

How Can Investors Access this Economic Miracle?

Without undertaking the risks and difficulties associated with accessing Colombia´s local stock exchange, investors can obtain exposure to Colombia´s economy by investing in the two Colombian companies listed on the NYSE: Ecopetrol and Bancolombia. They can also consider one of the two ETFs currently available: the Global X FTSE Colombia 20 ETF or the Market Vectors Colombia ETF .

For risk-averse investors both of these ETFs offer a good opportunity to obtain broad exposure to Colombia´s economy, particularly as their top-holdings include Ecopetrol and Bancolombia. But my preference is to invest directly into a specific company, like Ecopetrol.

Ecopetrol has been a favorite among investors, with growing production and a management team that has consistently delivered profitability and a solid return double digit return on equity in excess of 20%. However, the price of its shares have tumbled recently, sending it down by 24% for the year to date on the back of falling production and declining margins in 2012.

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