Colombia and Peru may be best known for being among the world’s largest producers of specialist coffee, but for more discriminating investors they have much more to offer. These two resource-rich countries have a collective population of around 76 million and demographic trends that point to strong population growth, declining dependency ratios, and a rising middle class. Independent central banks and relatively few populist policies by governments have meant that inflation has been successfully brought under control, in contrast to nearby Brazil and Argentina (figure 1).
Figure 1: Tamer inflation thanks to more effective government policy
Source: Bloomberg. Consumer prices inflation, year-on-year change. Monthly data from December 1993 to May 2013 (Peru to March 2013).
Strong economic growth has greatly improved government finances in both countries, enabling them to embark on ambitious and much-needed infrastructure investments. Befitting of emerging market countries, red tape will hold up some of these projects, but such is the volume of these plans that they should underpin growth for the rest of the decade. The creation of the Pacific Alliance, along with Chile and Mexico, will reduce trade barriers, enabling better integration into the global economy. A successful conclusion to peace talks with the FARC guerrillas would further reduce security concerns that have blighted Colombia’s recent past and prompt an additional catalyst for investment in the country.
Chile is often held up as the success story in the region and the policies of Colombia and Peru are aimed at replicating this success. With per capita gross domestic product (GDP) approximately less than half that of Chile, the potential of Colombia and Peru is clear to see. Encouragingly for investors, the capital markets in both countries are exhibiting improving liquidity and corporate governance. The first place to look would be the financial and consumer sectors, where low penetration of financial products and formal retail alongside rising income levels point to significant growth potential over the long term.
While we believe Colombia and Peru both offer attractive growth potential, we are currently overweight Peru and underweight Colombia in our portfolios, as we find more attractive valuations in Peru. In Peru our largest overweight is toconstruction & engineering services business Graňa y Montero (2.3%) and shopping mall and supermarket operator InRetail Peru (0.8%). In Colombia, we have an underweight holding in oil major Ecopetrol (1.1%) and an overweight position in oil and gas producer Gran Tierra Energy (0.9%).
By the Emerging Market Equities team at Henderson Global Investors