Why Peru and Colombia Have a Higher Spread of Profitability than Emerging Markets Globally

Higher profitability + idiosyncratic opportunities

Felipe Asenjo, regional head of equities at SURA Asset Management sees valuable investment opportunities in the Pacific Alliance countries of Mexico (EWW), Chile (ECH), Columbia (ICOL) and Peru (EPU). Asenjo expects companies in these regions to grow at 17% CAGR over the next 3 years. “The Pacific alliance has always had a higher spread of profitability than global emerging markets… the second region in the world in the last 15 years with the highest delivery of earnings growth,” said Asenjo.

Meanwhile, Diana Kiluta Amoa, senior portfolio manager on the local-currency team at JP Morgan (JPM) Asset Management sees idiosyncratic investment opportunities in Peru and Colombia.

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Peru

Private investment in Peru (EPU) is expected to bounce back and grow 0.5% in 2017 and gradually reach 6.5% growth by 2021, according to the Economy and Finance Ministry. The Ministry expects greater infrastructure investment due to the resumption of projects linked to Brazilian enterprises, to be the primary driver of such growth. The agency also expects increased mining activity to boost private investment. The Finance Ministry also forecasts public investment to rise by 15% in 2017 and in 2018.

The Peruvian economy has already shown its resilience towards the El Niño phenomenon (causing heavy rains and flooding), by slowing less than expected. Prudent actions taken by the central bank such as cutting interest rates should “boost activity” and put Peru on track towards an expected 3% overall economic growth, claims Prime Minister Fernando Zavala.

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Colombia

According to Santiago Angel, head of the Colombian Mining Association, enormous potential lies on offer in the mining industry (XME) in Colombia (ICOL), which serves as a major growth engine for the economy. Angel sees the industry bringing in a whopping $1.5 billion in 2017 and $1.7 billion in 2018, with a five-year investment of $7.5 billion; provided the government guarantees legal certainty to businesses. Coal (KOL), gold (GLD), and copper (COPX) remain the three main mining sectors in Colombia.

AngloGold (AU) and Eco Oro Minerals (GYSLF) are the larger players in Colombia’s gold sector. The biggest coal companies are Drummond, Glencore (GLNCY) (GLNCF), Murray Energy, Colombia Natural Resources, and Cerrejon, which is jointly owned by BHP Billiton (BHP), Anglo American Plc (AAUKF) and Glencore.

Three Reasons Why Investors Are Still Betting on Mongolia

The light at the end of the tunnel

Not all is well with Mongolia (AZIA). Growth in the economy has tumbled with commodity prices, which account for over 90% of its export earnings. The economy’s GDP grew at just 1% in 2016 due to, a) commodity price decline, and b) slowdown in China demand for copper (JJC) (CPER) and coal (KOL). Meanwhile, the nation’s debt has been burgeoning, reaching $23 billion as of 4Q16.

At a time when Mongolia’s banks threaten an economic crash, Hong Kong-based Asia Frontier Capital is invested in the region. Thomas Hugger, chief executive officer, and founder of Asia Frontier Capital, a firm dedicated to investing in the Asian frontier markets (FRN) (FM), has maintained portfolio exposure to Mongolia for many years. “We see the light at the end of the tunnel,” Hugger recently told Frontera.

Hugger spoke about three key reasons for his belief in this frontier market’s long-term prospects.

1. Copper price recovery

Following a five-year slide (2011-2016), copper prices finally began to recover in early 2016. Over the past one year, the shiny metal’s price has surged 28.7%, with mining giants such as Anglo American (NGLOY), BHP Billiton (BHP), Glencore (GLNCY), and Rio Tinto (RIO), expecting it to rise further as excess supply seems to have come off the market. Moreover, the government initiated stimulus programs in China; which consumes 40% of world copper; have also contributed to the metal’s resurgence. Copper ore accounts for 42% of Mongolian exports.

Mongolia is ranked 12th in the world for copper reserves. The south Gobi Desert alone has an estimated of 35 million tons of copper. UK-based Central Asia Metals (CAML.L) and Rio Tinto (RIO), Canada-based Entrée Gold Inc. (EGI), Turquoise Hill Resources Ltd. (TRQ), and Kincora Copper Ltd (KCC) are among the foreign mining companies engaged in copper mining in Mongolia.

2. Coal price recovery

Coal, Mongolia’s number 2 export (14% of exports), has followed a similar trajectory; a five-year slide followed by a quick recovery through 2016 and continuing. Australian thermal coal has recorded a whopping 68.8% price gain over the past 1 year alone. Foreign companies engaged in coal mining in Mongolia include Australia-based Aspire Mining Limited (ASPXF) and Hong Kong-based Mongolia Energy Corporation Limited (MOAEF).

3. Foreign exchange influx

Hugger also expects the spat over Rio Tinto’s (RIO) $5.3 billion Oyu Tolgoi copper and gold mine in Mongolia to resolve soon. Rio Tinto would then be investing a lot into the second phase of the Oyu Tolgoi mine, thereby opening up a huge additional source of foreign exchange for the nation.

$440 million support extended by the IMF

The economy has recently been able to secure a $440 million loan package from the International Monetary Fund (IMF) to ease the country’s balance-of-payment pressures and support it’s government’s looming debt repayments. “The Asian Development Bank, the World Bank and bilateral partners including Japan and Korea are expected to provide up to another $3 billion in budget and project support, while the People’s Bank of China is expected to extend its 15 yuan billion ($2.2 billion) swap line with the Bank of Mongolia for at least another three years,” the IMF said in a statement on Sunday.

The package is thus, a part of the $5.5 billion bailout envisaged for this frontier market. According to Citigroup, we may see Mongolia tapping the international markets pursuant to the IMF deal.