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Peru, Colombia consumers draw investor interest

ReutersA money exchange house in Lima, Peru. Investment managers are seeing opportunities in Colombia and Peru as an increase in consumption puts the spotlight on sectors such as consumer staples and financial institutions.

LOS ANGELES (MarketWatch) -- Think young and think basic needs when you consider building exposure to Colombia and Peru.

That's the message from investment managers who have found opportunities in the two countries that are poised to grab a bigger share of growth in Latin America over the next few years, and who have expanded beyond the well-established markets of Brazil, Mexico and Chile.

"We ran some numbers...and the average age in Colombia is 28 years old. In Peru, it's 26, versus 37 for the U.S.," said Heiner Skaliks, portfolio manager of the Strategic Latin America Fund (SLATX) , which recently had a combined weighting of roughly 14% in Peru and Colombia.

Many consumers who make up the countries' youthful population and increasingly affluent middle class are "out there to buy their first car, their first house, starting to engage in credit-card transactions and out to buy their first washing machine," said Skaliks.

It's that increase in consumption that puts sectors such as consumer staples and financial institutions, and companies including Peru's largest banking firm Banco de Credito (CREDITC1) and consumer-goods maker Alicorp SAA (ALICORC1) on solid footing, he said.

In addition to a youthful population, Peru boasts a wealth of natural resources: it's the world's second biggest producer of copper and silver; it is also an important gold producer. Meanwhile, Colombia is undergoing an oil boom, a favorable development for majority state-owned oil producer Ecopetrol SA(EC) (ECOPETROL) .

Economic activity in both countries stands out in the region, with 2011 growth of 5.9% and 6.9% in Colombia and Peru, respectively, outstripping rates in most of the region and in developed economies world-wide. Even as the global economy slows, the International Monetary Fund expects Peru to grow 5.5% this year and 6% in 2013. Colombia is projected to grow by 4.7% this year and 4.4% in 2013.

Colombia, meanwhile, has touted a near doubling in foreign direct investment over a year. And after double-digit losses in 2011, equity benchmarks in Colombia and Peru saw jumps of at least 20% in local currency terms this year before paring year-to-date gains.

Investor interest in these markets reflects a remarkable improvement for both countries, where decades of political instability in Peru and civil war and battles over the cocaine trade in Colombia kept both off many investors' radar.

Now, "the two of them are extremely attractive markets [that] have gone through political and economic turnarounds," said Christian Deseglise, who heads sales in the Americas at HSBC Global Asset Management.

"They offer a very good macroeconomic story and hot territories where infrastructure, commodities and investments are potentially huge," he said. "It's a fascinating part of the world."

But risks remain, underscored by protests against expansion in resource sectors. In the second quarter, Colombia's IGBC (IGBC) equity index fell 11%, the blue-chip Colcap index lost 1% and Lima's LSE General Index (IGBVL) dropped 14% as investors dumped those emerging markets seen as riskiest in light of slowdowns in China and Europe.

ETFs, mining stocks

For those captivated by the countries' growth prospects, there is a slate of U.S.-listed securities from which to choose, though analysts say they'd like to see the list grow. One of the newest offerings is Peru's Cementos Pacasmayo SAA(CPAC) , whose shares debuted on the New York Stock Exchange in February.

Investment managers say exchange-traded funds, along with American Depositary Shares, including Bancolombia SA(CIB) , are the easiest vehicles for retail investors. The iShares MSCI All Peru Capped Index Fund (EPU) from BlackRock Fund Advisors and the Global X FTSE Colombia 20 ETF(GXG) are among the ETFs that provide exposure to the countries.

While companies supplying goods to consumers are hot, one of Latin America's traditional strengths -- its vast resources in energy, metals and minerals -- still presents plenty of opportunity, said Frank Holmes, chief investment officer at U.S. Global Investors. Its offerings include the Global Resources Fund (PSPFX) and the Gold and Precious Metals Fund (USERX) , which held a stake in Peruvian mining heavyweight Buenaventura SA (BVN) .

Holmes said demand for consumer goods from companies like Apple Inc. (AAPL) suggested that demand for raw materials sourced in Peru was likely to stay strong.

"At the same time that Apple is the richest company in America, all of their products need basic materials, plastics, utilities. So I don't think the need for these and other big commodities in a portfolio are going to go away."

Keeping in mind the need for vast infrastructure improvements in Peru, Skaliks pointed to his holding in Ferreycorp SA (FERREYC1) , a distributor of Caterpillar Inc.-branded (CAT) industrial equipment. Ferreycorp only trades on the local exchange, he noted, suggesting that retail investors work with a broker to gain access to locally traded equities.

Another way to think about investing in Colombia or Peru is to think of Canada, said Holmes at U.S. Global Investors, whose holdings include Toronto-based Pacific Rubiales Energy Corp. (PRE) (PREC) . Rubiales runs Colombia's biggest oil field and has expanded to Peru. "It's interesting that you can find Canadian companies [that have] 100% of their assets in a foreign country like Colombia, but you have same accounting procedures and legal disclosures that you have in the U.S."

Rewards and risks

An indicator of interest in a country's prospects, foreign direct investment in Colombia surged more than 90% in 2011 from the year-ago period to a record $13.2 billion. Colombian President Juan Manuel Santos at a recent bankers' meeting reportedly touted a 24% rate of FDI growth so far in 2012.

The growth in funds comes amid a series of wins for the Colombian market. A long-awaited free-trade agreement between Colombia and the United States is now in effect and a year ago Colombia landed its third investment-grade rating.

Economic growth in Colombia and Peru over the next five years could range between 5% and 7% "under the assumption that FDI will continue to go to the countries, particularly to the mining sectors, and that will increase production capacity," said Alfredo Coutino, director of Latin American research at Moody's Analytics.

Peru brought in $7.66 billion in FDI in 2011, up 4% from 2010. The central bank expects this year's level to be around 2010's level, then to grow to $8.72 billion in 2013.

Peruvian stocks stumbled last year, in significant part because many investors "were very worried about President Ollanta Humala," said Javier Creixell, portfolio manager of the Epiphany FFV Latin America Fund (ELANX) , which has a 9% weighting in Peru. Markets were nervous that Humala would nationalize natural-resources assets, much like Hugo Chavez has done as president of Venezuela. But instead Humala adopted market-friendly policies.

It seems "he learned a lesson from [former Brazilian President] Lula instead of Chavez...and that's a good point for Peru. It has a lot of resources and the Peruvian people work hard," said Creixell.

Along with global slowdown concerns, analysts say risks to the Peruvian and Colombian economies include lower prices for natural resources and pullbacks in demand for commodities, particularly from China, which both Peru and Brazil call their largest trading partner.

Investing risks also include violent protests in Colombia and Peru over mining and energy projects. Five workers died recently following an attack at an Ecopetrol oil well in Colombia. Meanwhile, protests over a $4.8 billion gold and copper project have resulted in the deaths of five people in Peru. U.S.-based Newmont Mining Corp. (NEM) and Buenavatura each carry the heaviest stakes in the project.

Protesters say the Peruvian project threatens their water supply. Peru's President Humala has reportedly said the government will hold discussions in an effort to bring the conflict to an end.