These Two African Countries Account For 60% Of the World’s Cocoa Production

World cocoa production is dominated by the emerging and frontier markets

The list of world’s top 10 cocoa producers is comprised of all emerging (EEM) (VWO) and frontier (FM) (FRN) market nations. Ivory Coast and Ghana top the list with about 1.5 million and 0.8 million tons of cocoa beans produced, annually. Together, they account for approximately 60% of the world’s cocoa production.

Ivory Coast and Ghana produce 60% of the world’s cocoa

In Ivory Coast, leader of the top cocoa producers in the world, the cash crop accounts for over 60% of its trade revenue. Chocolate manufacturers such as Nestle and Cadbury receive much of their cocoa from Ivory Coast.

Ghana is the second leading cocoa manufacturing country. Cocoa is critical to the country, accounting for 1/6th of the economy’s GDP. Next in line are Indonesia (EIDO), Nigeria (NGE), Cameroon, Brazil (EWZ), Ecuador, Mexico (EWW), Peru (EPU), and the Dominican Republic, all contributing an outsized share of world cocoa production.

Now, the price of cocoa has been sliding over the past year on account of a supply glut, leaving a bitter taste in these nations, which are exceptionally dependent on the soft commodity.

Cocoa farmers earn just 6.6% of the price of chocolate

Ivory Coast and Ghana currently have a combined GDP of $69.3 billion, according to World Bank data. Meanwhile, chocolate manufacturers such as Nestle have annual sales of about $90 billion. Farmers employed towards producing 60% of the world’s key chocolate ingredient end up earning about 6.6% of the final price of chocolate.

However, these two frontier markets are now looking to capture a larger share of the earning, and have more influence on world cocoa prices. In the next section, we will take a closer look at their strategies.

No More Border Wall: Ecuador to Mend Relations With Peru

Suspension of the Ecuador-Peru border wall

On July 14th, Ecuador’s Foreign Minister Maria Fernanda Espinosa announced that the country had decided to halt the construction of the border wall with Peru (EPU). The wall was built as a flood precaution by Ecuador. It has been the center of controversy for some time now, straining diplomatic relations between the two countries. The issue had gained prominence following US President Donald Trump’s pledge to build a wall between the US (SPY) (IWM) and Mexico (EEW).

Peru, which believes that the wall infringed on a 1998 deal which prohibits construction within 10 meters of the border, recently recalled its ambassador from the country to express its rage over the decision. Subsequently, the foreign ministry of Ecuador announced the suspension of the construction of the mile-long, 13-foot high wall between the two Latin American (ILF) (GML) countries.

Ecuador mending relations with Peru

The suspension should bode well for Andean (AND) countries. The wall would have led to about 5,000 job losses on each side of the wall, primarily in the local fish trade. Currently, fishermen cart their fresh catches over the canal which outlines the border across bamboo footbridges. With the wall in place, workers would have had to take a lengthy detour to unload their catches in Peru probably putting an end to the trade.

Moreover, Peru counts among the top 3 export destinations of Ecuador. Close to $1 billion worth of goods are exported from Ecuador to Peru, accounting for 5.1% of its exports (see chart above). The wall would have certainly impacted cross-border trade volumes.

Now, while on one hand, Ecuador has taken a step to mend its diplomatic relations with Peru, on the other hand, it stands a chance to strain its relations with the OPEC (Organization of the Petroleum Exporting Countries). The next part of this explains how.

After Weathering the Storm Earlier This Year, What Will Drive Peru’s Stock Market?

In the first article of this series, we explored the stocks which have been holding back the broader stock market and exchange-traded funds investing in Peru. Meanwhile, the second article details issues facing the country and how it’s dealing with them.

So what do these components combined say about the outlook for Peruvian equities?

Short-term pain

Continued short-term pain for stocks from the country is likely, primarily due to reduced overseas investment in light of the ongoing investigations in the Odebrecht scandal involving previous administrations of the nation.

Meanwhile, investors would also like to see tangible signs of implementation of the government’s plan for rebuilding the country after being hit by severe floods earlier this year.

Another aspect which could hurt investment at least in the short-term is the political challenge faced by the country.

The government led by President Pedro Pablo Kuczynski is not yet a year old but has already seen three ministers – Jaime Saavedra (Education), Martin Vizcarra (Transport), and Alfredo Thorne (Finance) – being sacked by the congress. A similar fate probably awaits the Interior Minister Carlos Basombrío.

Thorne is the latest casualty in the $530 million Chinchero International Airport project contract matter which was also responsible for Vizcarra’s ouster. Kuczynski has named Prime Minister Fernando Zavala as Thorne’s replacement.

Political investigations such as this will continue to keep investors at bay for the short-term.

An economy with potential

Though the country is struggling to grow at present, it is considered to be among the most robust in Latin America.

Apart from the efforts the government is making to get the economy back on track and tackle the corruption scandal, it has another component which can help it bounce back — monetary policy.

The central bank reduced rates in May for the first time in over two years by 25 basis points, but held on to the 4% level at the meeting in June. Central bank President Julio Velarde has said that the institution will wait for the “right moment” to further reduce rates, preferably once credit demand is rising.

Outlook on equities

The table above lists the price-to-earnings (P/E) ratios of the ETFs tracking the five major emerging market economies of Latin America. While Brazil (EWZ) is the cheapest, Mexico (EWW) is the most expensive. Peru (EPU) is in the middle, between Chile (ECH) and Colombia (ICOL).

Peruvian equities may continue witnessing some headwinds in the short-term. Moderate risk-taking investors might want to wait for these headwinds to pass before initiating or adding to their stock holdings from the country.

However, more adventurous investors would find current valuations quite attractive and may initiate small buying positions. Those investors not taking the fund route need to steer clear of all firms which have connections to the Odebrecht scandal though.

These Are The 5 Equities Holding The Peruvian Stock Market Back In 2017

Peruvian equities have been facing a number of headwinds in 2017. After a strong start to the year which saw the iShares MSCI All Peru Capped ETF (EPU) climb 11% by early February, the ETF has lost a lot of ground and is up only 4.4% for the year to June 22.

This performance places it better than only Brazil among the five countries included in the MSCI Emerging Markets Latin America Index.

The iShares MSCI Brazil Capped ETF (EWZ) is nearly flat for the year. Its performance has driven down the entire EM Latin America Index as it forms a mammoth 55.5% of the exposure of the Index. Meanwhile, Peru forms only 2.9% – the smallest allocation of the five countries.

The EPU is neck-and neck with the Global X MSCI Colombia ETF (GXG) and far behind the iShares MSCI Chile Capped ETF (ECH) and the iShares MSCI Mexico Capped ETF (EWW).

The stocks which have hurt the EPU

Industrials is the sector which has hurt the fund the most so far in 2017. Of the two holdings from the sector, engineering and construction major Graña y Montero S.A.A. (GRAM) has been the biggest negative contributor to the fund. In terms of total returns, the stock has plummeted 54.7% in YTD 2017 (in Peruvian Sol terms). However, since it forms only approximately 2% of the fund, the impact has been somewhat contained.

The second biggest negative contributor comes from the consumer staples sector. Multi-format retailer InRetail Perú Corp is one of the three holdings from the sector in the EPU and forms 3.1% of the fund. The stock is down 8.8% on the year, and has dragged down the positive contribution by the top holding from the sector – Alicorp S.A.A.

The third worst performer in 2017 so far comes from the materials sector. FOSSAL S.A.A. is a spin-off from cement-maker Cementos Pacasmayo S.A.A. (CPAC). The stock is no longer part of EPU’s portfolio, but its poor performance this year still makes it the third largest negative contributor to the fund.

The next two poorest performing stocks come from the utilities sector. Utilities follow industrials as the second worst performing sector with both holdings – Luz del Sur S.A.A. and Enel Distribución Perú S.A.A. in that order – dragging on the fund.

Let’s look at the headwinds which have held Peruvian equities back on a broader level in the next article.

These 5 Frontier Markets Are ‘Misunderstood and Undiscovered’

Frontier Markets which remain fairly misunderstood and undiscovered

From what Carlos Hardenberg told Citywire Selector in a recent interview, Africa (EZA) (GAF) is one of the frontier markets (FRN) (FM) where Franklin Templeton sees “a lot of opportunities.” Hardenberg is the director of frontier markets at Templeton Emerging Markets Group. The fund manager also sees similar opportunities in 3 Asian economies and 3 Latin American economies. According to Hardenberg, these markets remain “misunderstood and undiscovered.”

3 Asian markets where Franklin Templeton sees opportunities

In a recent article, we highlighted the key reason why fund managers are looking at Asian emerging markets right now. While Pakistan (PAK) and Vietnam (VNM) seem to be under the spotlight of many fund managers lately, Franklin Templeton’s Carlos Hardenberg identifies economies such as Cambodia, Sri Lanka, and Bangladesh as markets with opportunities presently. What’s particularly attractive about these markets is that they’re relatively undiscovered, which in a way, lends them more favorable valuations. Our articles, Revealed: Cambodia’s Most Promising Tech Startups and 5 Reasons Why Bangladesh Presents an Attractive Investment Opportunity offer more insights on these markets.

2 Latin American markets where Franklin Templeton is focusing 

In Latin America, while the markets are usually abuzz with news and economic developments in the bigger markets such as Mexico (EWW) or Brazil (EWZ), smaller markets such as Peru (EPU) and Columbia (ICOL) are what offer opportunities, according to Franklin Templeton’s Hardenberg. Interestingly, Peru and Colombia have a higher spread of profitability than emerging markets globally. Even JP Morgan sees idiosyncratic opportunities in five markets, which include Peru and Columbia.

The Peruvian equity tracking iShares MSCI All Peru Capped ETF (EPU) is up 5.55% YTD (as of May 27), while the iShares MSCI Colombia Capped ETF (ICOL) has gained 11.5% so far this year.

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.

[stockdio-historical-chart stockExchange=”NYSENasdaq” width=”100%” symbol=”EPU” displayPrices=”Lines” performance=”false” from=”2017-01-01″ to=”2017-05-16″ allowPeriodChange=”true” height=”350px” culture=”English-US”]


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.

[stockdio-historical-chart stockExchange=”NYSENasdaq” width=”100%” symbol=”ICOL” displayPrices=”Lines” performance=”false” from=”2017-01-01″ to=”2017-05-16″ allowPeriodChange=”true” height=”350px” culture=”English-US”]


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.

JP Morgan Sees Idiosyncratic Investment Opportunities in These 5 Frontier Markets

5 idiosyncratic investment opportunities

Diana Kiluta Amoa, senior portfolio manager on the local-currency team at JPMorgan Asset Management sees idiosyncratic investment opportunities in five frontier markets (FRN) (FM). These include Ghana (EZA), Dominican Republic, Egypt (EGPT), Peru (EPU), and Colombia (ICOL). Let’s take a quick look at how these markets are placed currently.


Inflation in Ghana cooled to 13.1% for 1Q17. It stood at 18.9% in 1Q16.

In the near-term, agribusinesses in Ghana should benefit on the back of the following three factors:

  1. Farmers are expected to receive subsidized fertilizers in the coming weeks
  2. Rainfall is seen normal to above normal levels across forest area, according to the Ghana Meteorological Agency.
  3. The United States Agency for International Development (USAID), was seen promoting investments in the Ghanaian agriculture sector during the recent 4th Annual Ghana Agribusiness Investment Summit hosted on May 4th. The event themed “mobilizing strategic investment for agriculture” primarily stressed the importance of leveraging financial opportunities for Ghanaian agribusinesses.

“When you look at the demographics of the country, you look at the microeconomic factors in the country, you can see that there is clearly an opportunity to actually position Ghana as one of the leading countries in West Africa,” said Yolanda Zoleka Cuba, CEO Vodafone Ghana.

Dominican Republic

The Dominican Republic announced an impressive 6.4% increase in 2016 for overall tourism to the country, a 10% increase from 2015. Tourism is one of the key elements driving growth in the economy. The US accounted for about 35% of all tourists in the country in 2016. Consequently, the economy’s Dominican hotel occupancy rate also rose to 78%, up 18% from last year.


Egypt is set to announce a ‘social package’ soon according to Deputy Finance Minister Ahmed Kouchouk. Inflation in the economy is expected to average 22.8% in the fiscal year starting July 1 and will ease to 9.7% the following year, according to Kouchouk. The government plans to pay arrears to foreign oil and gas companies operating in the country by the end of June. The government also has a Eurobond sale in late May 2017 and another international bond sale by early 2018 on the cards currently.

Rising inflation is one of the key challenges facing the economy since the removal of currency controls and fuel subsidies in November 2016; all in an attempt to secure a $12 billion loan from the IMF.

The Best And Worst ETFs For Investing in Latin America

Investing in Latin American equities

Directly investing in Latin American markets can be risky for foreign investors as most of the countries are frontier markets. ETFs investing in Latin America stock markets are largely concentrated in two major markets – Brazil and Mexico. While some countries have opened up their stock markets to foreign investors, these economies remain difficult to access due to illiquidity and poor trading exchanges.

Investors betting on the revival of Latin American economies have two options. They can either consider investing in ETFs providing exposure to the entire Latin American region or place their bets in the continent’s largest markets through country-focused ETFs.

Regional ETFs

The iShares Latin America 40 ETF (ILF) provides exposure to the overall Latin American region but 80% of its holdings are concentrated in Brazil and Mexico, followed by Chile, Peru and Colombia. It invests in a portfolio of the 40 largest companies in the region, which are more than 50% dedicated to the financial and consumer defensive sectors. YTD, this ETF has climbed up 14%.

Another popular Latin American ETF is the SPDR S&P Emerging Latin America ETF (GML). This ETF invests in a basket of 245 stocks, thereby providing larger exposure to various stocks in the region. YTD this ETF has gained 15.1%.

Country ETFs

Investors seeking concentrated exposure in specific countries can consider investing in the following country ETFs:

  • iShares MSCI Brazil Capped ETF (EWZ)
  • iShares MSCI Mexico Capped ETF (EWW)
  • iShares MSCI Chile Capped ETF (ECH)
  • Global X MSCI Argentina ETF (ARGT)
  • iShares MSCI All Peru Capped ETF (EPU)
  • iShares MSCI Colombia Capped ETF (ICOL)

ETFs investing in Brazil have outperformed in the last two years as the country continues to recover from a recession. YTD the iShares MSCI Brazil Capped ETF has gained 13.4% as investors are pinning their hopes on reforms in a recession-struck country.

It’s All Blue Skies, Not Bumpy Roads for Latin America

Blue skies ahead

Arthur Rubin, Head of Latin America Debt Capital Markets, SMBC Nikko Securities America, Inc., who was recently interviewed by Bonds & Loans, sees all blue skies ahead for Latin America, no bumpy roads. Over the past 18 months, whenever we’ve seen some event causing credit spreads to widen, it has usually been very short-lived, said Rubin. He sees two major tailwinds boosting Latin America to blue skies.

Economic Tailwinds

The rally in copper and base metals is already having a positive spill-over effect on Latin America (ILF). And the markets expect the rally to go on. So, if there is a re-pricing or correction, it may have serious ramifications for economies like Peru (EPU) & Chile (ECH), believes Rubin.

Moreover, governments in both Colombia and Peru are focused on infrastructure. In Peru, Rubin sees a lot of things going on in the power sector, more infrastructural development in the energy refining and power generation space. In Colombia, policy direction is going the right way, and the government is making strides in bringing inflation back down to levels near its target.

The risk that remains for Latin America currently is of Chinese (FXI) (YINN) growth underperforming. At the end of the day, the rally in commodities owes a lot to the perception that China is back on a more stable growth path. If the pace of growth in China falls short of expectations, it would affect the recovery in commodity prices, and consequently commodity dependent Latin America economies.

Political Tailwinds

Left-wing leadership, often associated with ‘populism’ as opposed to ‘conservatism’, seems to be taking a back seat in Latin America.

  • Argentina is doing better under the aegis of its new right-wing president, Mauricio Macri
  • Mexico is being led by its right-wing president Enrique Pena Nieto since December 2012.
  • Conservative Michel Temer holds the office of the President of Brazil since August 2016.

In Chile, billionaire Sebastián Piñera of the conservative Chile Vamos coalition is seeking to return to presidency in November this year, as the left-leaning governing coalition is already in disorder.

The Greatest Risk Facing Latin American Economies Is the One We Cannot See

The risk we cannot see

Latin American equity has been a strong performer thus far this year. The iShares Latin America 40 ETF (ILF) has returned 12.7% so far this year (as of March 23), an outsized driver of emerging market (EEM) (VWO) performance. The rally, driven by the commodity price rebound has been instrumental in driving up the stock market. The market upswing and the continued preference for emerging market debt seems to indicate that investors in the Latin American economies are shrugging off the near-term risks posed by the Trump administration.

[stockdio-historical-chart stockExchange=”NYSENasdaq” width=”100%” symbol=”ILF” compare=”EEM” displayPrices=”Lines” performance=”true” from=”2017-01-01″ to=”2017-03-23″ allowPeriodChange=”true” height=”350px” culture=”English-US”]

Pockets of uncertainty

However, the greatest risk facing the Latin American economies is the one we cannot see, said Arthur Rubin, Head of Latin America Debt Capital Markets, SMBC Nikko Securities America, Inc., during a March 23 interview with Bonds & Loans. There remain pockets of uncertainty, says Rubin. “The new norm under the Trump administration maybe pockets of uncertainty, driven by unpredictable and unforeseen policy initiatives that don’t really last that long.” The markets are already pricing in the rate hikes expected in the U.S. However, in the event of a policy occurrence beyond the expected, emerging markets such as those placed in Latin America, stand more exposed to risk of possible repercussions.

Local-debt winning investor favor

While Rubin does agree that the volume of international debt issued globally is on the rise, he doesn’t see Latin American economies such as Colombia (GXG) (ICOL), Peru (EPU), and Chile (ECH), taking the plunge, just yet. Credit spreads, which are beginning to tighten for many economies, are still wide enough for certain LatAm economies.

Local currency emerging market debt is already flying high amid U.S. policy reshuffle. The current and expected U.S. policy reshuffle including monetary policy tightening, along with protectionist curbs are expected to strengthen the U.S. dollar (UUP), which works against holders of emerging market (EEM) (VWO) dollar-denominated debt which gets expensive with a rising dollar. This is when local-currency debt takes center stage as the instrument that is immune to such policy risk.

What Could Make Dollar-Funding an Attractive Option in Colombia?

Peso funding continues to be attractive in Colombia

There’s a perception that credit conditions tightening in Colombia (GXG) (ICOL) will cause borrowers to begin to look towards dollar funding. However, SMBC Nikko Securities America sees peso funding continuing to be attractive and sufficient, at least for now. If growth in Colombia starts moving up to around 3 or 4%, such that demand for credit becomes more robust, then we could see the constraint showing up, said Arthur Rubin, Head of Latin America (ILF) Debt Capital Markets at SMBC.

What could make dollar-funding at attractive option?

  1. The need for international funding should arise only when we see sustained high levels of economic growth in the region, which is when we would also witness a rise in local funding cost, and credit spreads between local and international funding, tightening.
  2. Moreover, with the markets already pricing in the two 25 basis point increases by the Fed this year, it would only take an unexpected occurrence, to make dollar-funding attractive for countries like Colombia (ICOL), Peru (EPU) and Chile (ECH).

For now, dollar-funding isn’t as compelling an option

For now, credit growth in the corporate sector in Colombia has been declining, keeping any stress on bank liquidity at bay. We are still seeing a number of Colombian peso bonds being floated. Large borrowers such as utilities and consumer firms are able to secure peso funding domestically. Moreover, local-currency funding continues to prove more attractive in cost terms as compared to dollar-funding.

“The need to diversify funding sources in both Peru and Colombia, hasn’t really been there,” said Rubin. “With domestic capital markets and local-currency funding being able to suffice the funding needs arising in Colombia and Peru as of now, going abroad for dollar-funding isn’t as compelling an option.”

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.