July 22, 2009 By: Wayne Tompkins
It is the Latin American country with the decade’s lowest inflation rate, the fastest growing
economy and which, during that time has nearly halved its poverty rate. It’s banks are well
reserved and non-performing loans are at about 2 percent.
Some would guess that country to be Brazil, or Chile, or even Mexico — incorrectly. Here’s a hint:
The correct answer might leave one Inca-credulous.
"Peru is an untold story — a story that very few people really know,” said Daniel Gamba, Barclays Global Investors’ chief executive for Latin America and the Caribbean. “People actually come to
me and ask, ‘Is what you’re saying true?’ "
The investment community is taking notice: BGI’s iShares unit last month rolled out its MSCI All
Peru Capped Index Fund, a basket of 25 Peruvian companies and the first investment vehicle of
its kind allowing U.S. investors to participate in Peru’s economy (BlackRock is in the process of
acquiring BGI, the main asset manager that in turn owns the iShares division).
"Until now, there was no vehicle to actually invest and get your views on Peru expressed,” Gamba Daniel Gamba said on a recent visit to Miami. He was joined by Claudia Cooper Fort, an official with Peru’s economics ministry.
"This is a fund that replicates the top 25 securities of companies headquartered in Peru, which happened to have 98 percent of all of the market capitalization of Peru,” Gamba said. “So you get all that’s listed in Peru. You have mining, you have finance, you have utilities. Traditionally, in the U.S., if you wanted to buy Peru the only way you could do it is either a derivative or ADRs
(American Depository Receipts).”
ADRs represent shares of stock in an overseas corporation and trade on U.S. stock exchanges, but not all offshore companies offer them.
The Pacific Rim nation is forecasting a 3 percent to 4 percent growth in gross domestic product for 2009, as the developed world is mired in recession and other major Latin American players are projecting flat or negative growth. Some economists see 5 percent growth in 2010 with commodities rebounding as the government steps up spending of three years’ of budget surpluses, which are fueling a $3 billion stimulus plan to offset slowing private investment.
Peru’s economy has grown an average of 6.8 percent a year since 2002 — the region’s highest — during which it also maintained its lowest inflation rate, 2.4 percent, according to the International Monetary Fund.
"Peru has done extremely well in terms of trying to keep their inflationary issues under control,” said Michael Diaz Jr., managing partner of international law firm Diaz Reus & Targ in Miami. “You have a lot of flight capital from nearby countries such as Venezuela going into Peru.”
The Land of the Incas also is climbing the charts as a trading partner for South Florida. According to the U.S. Department of Commerce, the state’s exports to Peru nearly doubled in a single year, from $763 million in 2007 to $1.34 billion in 2008, with computers and machinery accounting for more than half the total.
"Certainly, they’ve been very aggressive in terms of their international Cooper Fort trade, inviting international investors certainly from the Far East and China,” Diaz said. “A lot of their mining operations are joint venture projects” with major multinationals.
While a modest economy in size, Peru’s 2008 GDP was about $128 billion, surging prices for its mineral exports — especially to China — and its 2006 free trade agreement with the U.S. have helped spur its growth. Turning Peru into a prospering country was not an overnight event, however.
"We had dreadful macroeconomic policies during the ‘80s,” said Fort, director of economic and social studies for Peru’s Economy and Finance ministry. “We had hyperinflation and our macroeconomics were probably the worst on the whole continent. So now, it’s the best one. We started after this trauma actually very sound macroeconomic policies. That has been institutionalized in Peru so it’s very hard to go back.”
Though Alberto Fujimori, the president during the ‘90s, currently is in prison for corruption and human rights violations, his administration’s economic policies began Peru’s turnaround.
"We have saved fiscally and have had a very prudent monetary policy,” Fort said. “No inflation and a stable exchange rate allows low interest rates, which have encouraged long-term loans, investment and housing. Now we can implement expansionary monetary and fiscal policies without actually risking our macroeconomic stability.”
The country’s stock exchange, the Lima General Index, is the world strongest performer this year, surging 81 percent in expectation of a rebound of commodity exports prices.
“If you look at the past one, three, five and eight years, it’s actually outperformed all of the Latin American stocks,” Gamba said. “It’s outperformed emerging markets and it’s outperformed developed markets — and it’s expected to outperform them, which is more important. The fundamentals are very good.”
While iShares’ Peru fund is a first, financial commentators have had some concerns.
Investment adviser and commentator Ron Rowland, writing for the Seeking Alpha Web site, noted the fund’s 65 percent exposure in the materials sector and that nearly a third of its assets are in just two stocks: Compania Minas Buenaventura and Southern Copper.
"Investing in Peru is really an investment in metals, mining, and materials stocks,” Rowland said. "So, on a day … when the materials sector is getting blasted, you’d expect [the fund] to perform in similar fashion.”
Rowland said the iShares fund is not alone. Many similar single country and emerging market exchange traded funds “have large sector exposure that is not readily identified in the fund’s name. The takeaway is to understand exactly what you are buying.”
Broker Roger Nusbaum, writing for TheStreet.com, said, “Peru is a proxy, of sorts, for commodities, and I would brace for the likelihood that the iShares All Peru Capped Index Fund will decline more than the commodities themselves during downturns. Consider that, from June until October 2008, the Lima General Index fell 63 percent. It has since doubled. That type of movement underscores the volatility.”
Gamba responds that the fund contains a number of precious metals, “not just gold and silver, but zinc, copper, aluminum that are produced, and a lot of these raw materials do not correlate to one another.”
The fund’s two largest companies are the most liquid names and the largest companies, Gamba said, noting that such a structure is no different from funds for other commodity-concentrated nations like Australia, Canada and Mexico.
And, of course, he adds, there is risk.
"It is volatile. It is as volatile as an emerging market fund or like any of the other country funds,” Gamba said. “You first need to say, ‘I want to do emerging markets,’ then you need to say, ‘I really like Latin America,’ and once you like Latin America, then you have to have Peru. Because Peru is expected to outperform the developed world. If you think Peru is a play you want to make, or if you really want to have a diversified commodities bet, then Peru is a good play.”
Economist Fort said the challenges also remain in the country itself.
"Macroeconomics is one of our strengths, but we have weaknesses,” she said. The nation’s poverty rate is down sharply from five years ago, when just over half of the population was in poverty, but the current 36.2 percent still leaves a long way to go.
"We also have major political challenges. We need political parties. We need a better judiciary, we need a better college education,” Fort said. “Those are long-term risks. The government has implemented some measures, but that’s going to take more than two or three years. There’s a long way to go; it’s going to be little by little.”
While Gamba oversees all of Latin America and the Caribbean for BGI, the success of Peru and the fund’s launch holds for him a special meaning.
"Being from Lima, it makes me very, very proud,” he said. “We know it’s a win-win investment for the country.”