Is Now The Perfect Time to Pick up Peru? (EPU, AND, BVN)
Arguably, the evolution of the Latin American investment thesis isn't yet complete if for no other reason than that when many U.S. investors think Latin America, they think Brazil and Mexico. That's it. Those that are willing to take on more risk know this region is home to several other high-growth economies that can be easily accessed via exchange traded funds.
Perhaps the most overlooked Latin American country represented by an ETF is Peru. The backdrop for more than a few episodes of the hit NatGeo show "Locked Up Abroad," Peru is home to vast deposits of precious metals. In 2011, the country was the sixth-largest gold producing nation in the world. It was also the second-largest silver producer behind Mexico, according to the Silver Institute.
Precious metals exposure alone might explain why the iShares MSCI All Peru Capped Index Fund (NYSE: EPU), the lone Peru-specific ETF on the market today, has amassed almost $397 million in assets under management since its debut in 2009. Just a week shy of its third birthday, EPU is predictably dominated by the dominated materials sector, which accounts for almost 55% of the fund's weight.
Even with the success of EPU, which clearly says some U.S. investors have found Peru alluring, there are still untold aspects regarding the Peruvian economic story, leading some to believe the the "P" in the CAPPT acronym is riskier than it actually is.
"The degree of country risk (in Peru) is relatively low and the risks resemble Colombia but on a lower scale," Medellin-based independent analyst Caiman Valores told Benzinga in an interview. "Overall the country offers a very solid investment opportunity with strong GDP growth and a precious and base metals mining boom."
U.S. investors only have a small number of options for investing directly in Peru. By ETFs, the choices are EPU and the Global X FTSE Andean 40 ETF (NYSE: AND), a fund that offers combination exposure to Chile, Colombia and Peru. In terms of individual Peruvian stocks listed in the U.S. that might ring a bell with U.S. investors, only Credicorp (NYSE: BAP), the largest Peruvian bank, and Buenaventura Mining (NYSE: BVN) qualify as somewhat familiar.
Southern Copper (NYSE: SCCO), a U.S.-based company with a significant Peruvian footprint, is another way of getting some Peru exposure. Overall, those three stocks account for about 46% of EPU's weight. Buenaventura and South Copper combine for 10% of AND's weight.
Still, the major issue giving Western pause about Peru is the country's political situation. Peru was on the fast track to attracting more foreign direct investment and gaining a reputation for having one of the more open economies in Latin America. Then leftist Ollanta Humala won last year's presidential election, an event that sent Peruvian equities plunging.
Valores acknowledges the degree of political risk in Peru is higher for investors than in neighboring Colombia, but it should be noted Humala hasn't run wild with nationalizing Peruvian industries since taking office.
"For Peru I would make very similar comments as for Colombia though the degree of political risk is higher as Humala does recognize the need to keep his electorate happy, so politically I see it somewhere between Colombia and Brazil," Valores said. "Overall Peru is a more advanced version of Colombia, that is they are further down the road to opening up to the world and developing their economy, but with a greater degree of regulation and lower security risk."
In other words, investors arguably face more political risk in Brazil, and they definitely face more in Argentina, than they do in Peru. That might be one reason why EPU is up 9.5% year-to-date while the iShares MSCI Brazil Index Fund (NYSE: EWZ) is down 10%.
Something that is worth considering about Peru. Standard & Poor's and Fitch Ratings both raised the country's foreign currency debt rating further into investment grade territory AFTER Humala took office. Currently trading just below $42, EPU could have upside to $45-$47 this year if the emerging markets and materials trades are reborn.
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