Colombia: Compelling Country, Compelling Valuation (AND, EC, GXG)
Colombia, South America's third-largest economy behind Brazil and Argentina, has become a major player on the emerging market stage in recent years.
The country's economic ascent has landed it a place as the "C" in the popular CIVETS acronym and growing investor awareness of Colombia has helped the Global X FTSE Colombia 20 ETF (NYSE: GXG) nearly triple since its February 2009 debut.
Today, the Global X FTSE Colombia 20 ETF, the largest Colombia-specific ETF, has more than $197 million in assets under management. The ETF can lay claim to being one of the best-performing funds since the March 2009 market bottom.
There is a lot to like about Colombia from an investment perspective, but despite efforts to change public perception of the country for the better, many investors still view this South American economic power as a politically volatile nation renowned for its cocaine production.
"I think the degree of country risk (in Colombia) is heavily over-rated by many foreign investors, especially as the government is very pro foreign investment and a close ally of the U.S.," Caiman Valores, an independent analyst based in Medellin, Colombia told Benzinga in an interview.
Close ties to the U.S. are a pivotal part of the Colombian economic story. In April, the U.S. government finally got around to approving a free trade agreement with Colombia, which went into effect last month.
Colombia is also moving up the list of oil exporters to the U.S., jumping to the eighth spot last year, according to the U.S. Energy Information Administration.
Regarding oil, the commodity is playing a pivotal role in Colombia's economic growth. The returns offered by GXG and the Global X FTSE Andean 40 ETF (NYSE: AND), an ETF that allocates almost 22 percent of its weight to Colombia indicate as much.
Colombia is one of just five countries in the world that is currently increasing its oil production. The country aims to pump 1 million barrels per day by the end of this year and is now South America's third-largest oil producer behind Venezuela and Brazil. Ecopetrol (NYSE: EC), Colombia's state-run oil company, is the largest holding in GXG and AND, accounting for 15.2 percent and 10 percent of those funds' weights, respectively.
The large allocations to Ecopetrol have served GXG and AND well this year. GXG has surged 16.4 percent while AND has climbed almost 15 percent. Year-to-date, shares of Ecopetrol have soared 37 percent, making it one of the best-performing oil stocks in the world. On the other hand, Petrobras (NYSE: PBR), Brazil's state-run oil company, has slid 17.3 percent, making it one of the worst-performing major oil stocks.
Even with its bounty of oil and minerals riches, Colombia still faces a nagging perception problem.
"The problem with Colombia is the historical perception para-militaries, communist guerillas and narco-traffickers," Valores said. "The real Colombia is a lot different to the media Colombia and investors only ever see what is on the news which is generally quite sensationalistic.”
"The country is also starting from a lower economic baseline so it is going to experience massive growth while it plays catch-up now that it has opened itself up to the world economically. It used to have a very heavily regulated economy which is now rapidly moving to being a very liberalized market economy and it is this with its very positive environment for foreign investment and resources that are driving the market."
Regarding political risk, Valores said he would give Colombia a rating of five or six on a scale of one to 10 with 10 being most risky.
In addition to tolerable political risk, Colombia equities also sport favorable valuations. GXG's trailing price/earnings ratio is 19.2, according to Bloomberg data. The 2012 and 2013 estimates fall to 15.3 and 13.1, according to AltaVista Research. GXG has also has a price/book ratio of 1.6. That compares to 2.74 for the iShares MSCI Emerging Markets Index Fund (NYSE: EEM), 3.35 for the iShares MSCI Brazil Index Fund (NYSE: EWZ) and 2.95 for the iShares MSCI All Peru Capped Index Fund (NYSE: EPU).
Colombia is also home to one of South America's more advanced, vibrant banking sectors and some analysts have speculated consolidation among Colombian banks will increase in the near future. Valores is bullish on Bancolombia (NYSE: CIB), Colombia's largest bank. That stock is the second-largest holding in AND and GXG, accounting for 8.1 percent and 12.3 percent of the funds' weights, respectively. Bancolombia currently yields 2.5 percent and its payout has quadrupled in the past eight years.
For more on Colombia ETFs, click here.
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Tags: Caiman Valores