When it comes to fast growing emerging market economies, Peru undoubtedly has been one of the shining stars of the past 3 years.This small South American nation (home to 30 million people, 45th largest population in the world) has experienced an unprecedented growth, thus catapulting itself on to the radar screens of emerging market investment managers.
When it comes to Peruvian investment options, one popular ETF choice is the IShares MSCI All Peru Capped Index Fund, Ticker EPU.This ETF holds 26 stocks and has a large concentration in 2 sectors: 62% of the stocks are in the materials sector (with a 16% overall allocation to Compania de Minas Buenaventura SA and 15% to Southern Cooper Corp) and 18% in the banking sector.
Let us take a look at the GDP growth rates over the past 3 years. The Peruvian economy has been one of the fastest growing world economies in terms of GDP growth: in 2008, GDP grew at 9.8%: 2009 GDP grew at 0.9% (when many in the developed world were experiencing negative growth rates) and in 2010 GDP grew at 8.78%.Along with this GDP growth, the Peruvian Stock Market performance has done just as spectacularly, with a 120% increase in 2009 and 65% in 2010. Peru has emerged as an attractive commodity based economy with low government debt levels, rapidly decreasing poverty levels and a large amount of valuable natural resources ( such as copper, silver, gold, petroleum, timber, fish, iron ore, coal, phosphate, potash, and natural gas).
With economic and stock market performance like that, it is no wonder why Peru has now become an attractive investment option for institutional money managers and retail investors looking for potentially high growth emerging market exposure. Along with the potential for high growth rates in small emerging market stock markets however, comes a high degree of geo-political risk that can cause high volatility/drastic short term losses and this risk is unfortunately often forgotten by some investors who are blinded in the absolute pursuit of high stock market returns, no matter the risk/reward ratio.This has been unfortunately the case for many latecomers to the Peruvian investment market, as 2011 has not treated investors so well, with the ETF EPU being down 18% in 2011 Year to Date(as of 6/9/11).
On the night of June 5 in Peru, the news of the new presidential elect Ollanta Humala caused the Peruvian Market to be shut down 2 times during the next trading day, as the Peruvian market decreased over 12% on June 6 (the biggest decline in one trading day on record). Investors were reacting to the news of the election of the new president elect Ollanta Humala, due to his anti-business campaign stance that promised for the distribution of wealth across the nation to the lower class of Peru, mainly coming from future new taxes on many of the large mining and banking corporations that make up the companies listed on the Peruvian exchange ( Bolsa de Valores de Lima). Ollanta Humula's recent election (Mr.Humula reportedly had a close friendship with Venezuelan President Hugo Chavez and similar political views) is generally thought to have a negative impact on future FDI (Foreign Direct Investment) in the Peruvian economy and the overall economic outlook of the country.
Nobody knows for sure what the exact economic and political policies of Mr.Humula will be as he gets ready to take his new position of the president of Peru and there is a debate about how his policies will impact the Peruvian economy going forward. What investors can learn from this situation (which many investors seem to take too lightly these days) is that in all economies (especially in highly concentrated emerging market economies), investment stories can change very rapidly and investors have to approach emerging market stock markets always with a a degree of caution and carefulness and in a manner that is well-diversified in a basket of emerging market economies, to decrease the risk of one nation's geo-political risks greatly impacting their investment portfolios.
Please refer to this bloomberg article to compliment my post:
http://www.bloomberg.com/news/2011-06-08/humala-must-give-peru-investors-clear-signals-benavides-says.html
When it comes to Peruvian investment options, one popular ETF choice is the IShares MSCI All Peru Capped Index Fund, Ticker EPU.This ETF holds 26 stocks and has a large concentration in 2 sectors: 62% of the stocks are in the materials sector (with a 16% overall allocation to Compania de Minas Buenaventura SA and 15% to Southern Cooper Corp) and 18% in the banking sector.
Let us take a look at the GDP growth rates over the past 3 years. The Peruvian economy has been one of the fastest growing world economies in terms of GDP growth: in 2008, GDP grew at 9.8%: 2009 GDP grew at 0.9% (when many in the developed world were experiencing negative growth rates) and in 2010 GDP grew at 8.78%.Along with this GDP growth, the Peruvian Stock Market performance has done just as spectacularly, with a 120% increase in 2009 and 65% in 2010. Peru has emerged as an attractive commodity based economy with low government debt levels, rapidly decreasing poverty levels and a large amount of valuable natural resources ( such as copper, silver, gold, petroleum, timber, fish, iron ore, coal, phosphate, potash, and natural gas).
With economic and stock market performance like that, it is no wonder why Peru has now become an attractive investment option for institutional money managers and retail investors looking for potentially high growth emerging market exposure. Along with the potential for high growth rates in small emerging market stock markets however, comes a high degree of geo-political risk that can cause high volatility/drastic short term losses and this risk is unfortunately often forgotten by some investors who are blinded in the absolute pursuit of high stock market returns, no matter the risk/reward ratio.This has been unfortunately the case for many latecomers to the Peruvian investment market, as 2011 has not treated investors so well, with the ETF EPU being down 18% in 2011 Year to Date(as of 6/9/11).
On the night of June 5 in Peru, the news of the new presidential elect Ollanta Humala caused the Peruvian Market to be shut down 2 times during the next trading day, as the Peruvian market decreased over 12% on June 6 (the biggest decline in one trading day on record). Investors were reacting to the news of the election of the new president elect Ollanta Humala, due to his anti-business campaign stance that promised for the distribution of wealth across the nation to the lower class of Peru, mainly coming from future new taxes on many of the large mining and banking corporations that make up the companies listed on the Peruvian exchange ( Bolsa de Valores de Lima). Ollanta Humula's recent election (Mr.Humula reportedly had a close friendship with Venezuelan President Hugo Chavez and similar political views) is generally thought to have a negative impact on future FDI (Foreign Direct Investment) in the Peruvian economy and the overall economic outlook of the country.
Nobody knows for sure what the exact economic and political policies of Mr.Humula will be as he gets ready to take his new position of the president of Peru and there is a debate about how his policies will impact the Peruvian economy going forward. What investors can learn from this situation (which many investors seem to take too lightly these days) is that in all economies (especially in highly concentrated emerging market economies), investment stories can change very rapidly and investors have to approach emerging market stock markets always with a a degree of caution and carefulness and in a manner that is well-diversified in a basket of emerging market economies, to decrease the risk of one nation's geo-political risks greatly impacting their investment portfolios.
Please refer to this bloomberg article to compliment my post:
http://www.bloomberg.com/news/2011-06-08/humala-must-give-peru-investors-clear-signals-benavides-says.html
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