Every decade or so, another emerging market moves into the fast lane by creating the platform for sustained long-term growth. Past examples include Japan in the 1950’s, South Korea in the 1970’s and Brazil in the 1990’s. More recently, the Andean nations of Chile, Colombia and Peru have been laying the foundation for long-term economic growth.
Investors might want to give these dynamic economies a look because near-term headwinds have meant dismal investment returns in 2013 for the ETFs tracking this region. With but one exception (a fund that opened in June), Andean-related ETFs have dropped between 11 percent and 30 percent year-to-date. And that could create opportunity for bargain hunters.
Commodity Overhang
The dismal recent performance for these markets can be directly tied to China. That country’s voracious appetite for copper and minerals slowed sharply this year, leading commodity prices to plunge. In Peru, where copper exports helped fuel a decade-long boom, the slump has hit hard because mining companies account for roughly half of the local stock market.
The good news is that commodity prices, most notably copper, have likely stabilized. “That’s looking like a likely scenario given the dearth of new copper mines coming on stream and a relatively bullish economic plan from China,” Will Landers, a portfolio manager for BlackRock’s Latin American equity funds, said in an e-mail interview.
The benign commodity backdrop should enable Peru’s other economic drivers to shine. “Growing middle classes and rising domestic consumption are the drivers for future growth,” Landers said.
According to the International Monetary Fund, the Peruvian economy almost doubled in size from 2002 through 2012 as real GDP grew at an average annual rate of 6.3 percent (the highest 10-year average growth in Peru’s history). Equally impressive was that the average annual inflation rate fell to 2.75 percent during that period.
And though commodities are currently a sore spot for Peru, Landers said the recent period of robust profits in the mining sector enabled the country to make significant investments in its infrastructure, improve logistics and provide strong employment. But he cautioned that more needs to be done to improve income distribution.
Steve Magami, founder of Agro Vision Corp., an investment firm focused on Peruvian agricultural development, has seen an uptick in global interest in Peru among investors. “There’s been a huge rise in foreign direct investment in Peru over the past few years,” he says, adding that the country’s finances are in great shape. “Peru’s debt ratings have been steadily rising for the past five years.”
But can Peru handle the recent commodities slump? Magami believes the economy has built a sustainable foundation for growth. “Despite the mining slowdown, other parts of the economy are still growing nicely,” he says. Magami credits the centrist policies of President Ollanta Humala, who many feared would lurch the country too far to the left. Instead, he has created a set of pro-business policies that are fostering growth.