Silver and Copper Will Power This Peruvian ETF Through 2017 1

Silver and Copper Will Power This Peruvian ETF Through 2017

The MSCI Peru Index continues to outdo several emerging markets

Peruvian equities have continued their stellar showing in 2016 into this year. The MSCI Peru Index has risen 9.1% for January 2017, emerging as the third best emerging market performer for the month. The Index has far outperformed the MSCI Latin America Index, which is up 7.5%. Peruvian stocks form only 3% of the Latin America Index.

Stocks from the country are coming off of a strong performance in 2016 with the index rising 54%. It was not only second to just Brazil in the Latin America region, it was the second best performing emerging market index for the year, edging out the MSCI Russia Index to the third spot with returns of 49%.

Though its annualized five year returns feature in the red, its 10-year returns of 6.4% place it second behind Thailand.

The iShares MSCI All Peru Capped ETF (EPU) tracks a different index than the MSCI Peru Index. The latter is comprised of only three stocks, one belonging to the financials and two belonging to the materials sector while the one that the ETF tracks is broad-based and is comprised of 26 stocks.

Peru drivers and outlook

Even though the MSCI All Peru Index is more broad-based than the MSCI Peru Index, 83% of the former is formed by the financials and materials sectors combined. For a country that ranks among the top three in the world in both silver and copper production, one would naturally expect equity indices to be dominated by companies from these sectors.

Hence, any expectation of a rise in metal prices in general and the two aforementioned in particular bodes well for equity investment in the country.

Another factor that works in favor of the country is its strong economy. Though small compared to peers like Brazil and Mexico, Peru is on much firmer ground at this juncture.

The central bank of Peru reduced its economic growth forecast for the country for 2017, but even after the cut, it expects the economy to grow 4.3% in the year after an estimated 4% growth in 2016. For 2017, the pace of growth is expected to be 4.2%. Meanwhile, inflation is expected to be 2.3% in 2017, making it the first time since 2013 that it is expected to be in the target range of 1%-3%.

With strong economic fundamentals in place and rising copper prices, Peruvian equities may continue going from strength to strength.

Let’s move on to the second best performing emerging market in the month of January in the next article.