What Are The Biggest Blockchain And Digital Currency Initiatives In Latin America Right Now?

Latin America: less faith in local currencies

Only 51% of the Latin American (ILF) economy has access to banking services, with political and currency fluctuations repeatedly undermining trust in local currencies. Moreover, increased compliance requirements and costs have caused many traditional financial institutions to exit the market. This phenomenon offers a growth opportunity to automated compliance, blockchain technology innovations, digital currency platforms and cross-border payments systems that help avoid transaction costs.

Blockchain innovation initiatives being taken in Latin America

  • Brazil’s central bank is seeking to investigate possible use cases for blockchain technology and is now moving toward prototyping.
  • Brazilian (EWZ) (CSBR) banks have already trodden the path. Banco Itaú and Banco Bradesco are a part of the R3 consortium. Banco Bradesco is launching pilot projects such as a new digital wallet using blockchain technology in partnership with eWally and Bit.One, to address cross-border payments.
  • Chile’s (ECH) Santiago Exchange and IBM (IBM) have partnered to implement blockchain technology into the country’s financial services sector.
  • Mexico (EWW) based start-up, Bitso secured $2.5 million in funding in early 2017.
  • Mexican venture capital fund, INGIA, invested in Abra, the US blockchain mobile payments startup.
  • In Argentina (ARGT), startups such as Rootcamp provides smart contract solutions for bitcoin technology, while SatoshiTango and Xapo provide bitcoin-based payments solutions.
  • Argentina-based Ripio wants to transform banking on the blockchain with the Ethereum blockchain’s ERC 20 protocol credit network using smart contracts for borrowers, lenders and underwriters.
  • Uruguay is currently experimenting with its own blockchain-based digital currency, according to a statement made by the Banco Central del Uruguay’s (BDC) chief, Mario Bergara.
  • Cryptobuyer, a leading cryptocurrency (ARKW) (ARKK), and digital assets company in the Latin America is the first company ever to install Bitcoin ATMs (BTMs) in a commercial bank (Banistmo Bank’s headquarters).

4 Mexico Stocks Hit Hardest By Souring NAFTA Negotiations

Peso plunges on NAFTA Negotiations

Mexico continues to struggle under US President Donald Trump’s uncertain protectionist policies. The Trump administration is contemplating big changes to the North American Free Trade Agreement (NAFTA) that could have a serious impact Mexico’s economy.

Concerns over the ongoing fourth round of NAFTA negotiations have hit the Mexican peso, driving it to five-month lows last week. In the last six months, the Peso has plunged nearly 6%, making it the worst performing emerging market currency in the period.

Bank of America Merrill Lynch strategists expressed pessimism over the Mexican peso, expecting it to decline further, “We do not expect the NAFTA renegotiations to be smooth. We expect investment to decrease while volatility could pick up,” they wrote in a report. “The high level of rates will start to play against economic growth. Positioning remains heavy in Mexico.”

Impact on ETFs and indices

Mexican stock markets have also struggled through the year as Mexican companies feel the heat over a decline in exports. The iShares MSCI Mexico ETF (EWW) is down 6.8% over the last one month, while the benchmark IPC Index has lost 2% in value.

Moody’s forecasts Mexico’s GDP could decline by 4% if the NAFTA pact is terminated. Even though this decline is lower than the 6.5% decline in GDP during the 2009 financial crisis, it would lead to a “severe confidence shock” for the broader economy.

Barclays expects the cost of manufacturing would rise by 10-12% in Mexico due to added tariffs if NAFTA is revoked.

Mexico’s exports to the United States make up nearly 25% of its GDP, resulting in considerable risks for export-oriented enterprises in the event that NAFTA uprooted. Mexico is the third largest trading partner for the United States, just behind China and Canada. In 2016, US imported goods worth $294 billion.

Vehicles make up nearly 24% of total exports from Mexico, while electrical equipment, machinery including computers, and mineral fuels make up 20%, 16.5% and 4.8% of exports respectively. These sectors will be hit hardest in case tariffs are imposed on imports from Mexico.

Stocks hit worst and why

Large export-oriented corporations are most at risk to the potential implementation of trade barriers by the United States. This includes large companies like Alfa Sab Mexico, Gentera SAB, Empresas ICA and Mexichem SAB.

Amidst ongoing NAFTA negotiations, in the last one-month, shares of these companies have tanked 25%, 18%, 17% and 16% respectively.

1.    Alfa S.A.B. de C.V

Alfa Group is a Mexican conglomerate with diversified businesses ranging from petrochemicals, auto components, FMCG, oil & natural gas and IT/telecom services. The company is the world’s largest producer of engine blocks and cylinder heads for automakers.

Alfa operates in 21 countries across the world. The company operates under five major business heads Alpek, the petrochemical company; Nemak, the aluminum auto components company; Sigma Alimentos, the refrigerated foods company; Alestra, the IT & telecom company; and Newpek, the oil and natural gas extraction company.

In 2016, Alfa group generated nearly 24% of its revenues from the United States, thereby putting it at significant risks to the withdrawal of the NAFTA pact.

Alfa Group is currently listed on the Mexican Stock Exchange and the Berlin Stock Exchange with tickers ALFAA.MX and G4L.BE. The company’s shares are also listed on US OTC Markets with ticker ALFFF. Furthermore, the company is a constituent of the Mexican benchmark index IPC and leading S&P and MSCI Indices tracking Latin American securities. In the last month, shares of the company have declined nearly 26% making it the worst performer among its peers. YTD in 2017, shares of Alfa Group lost 14% in value.

2.    Gentera SAB

Gentera SAB, earlier known as Compartamos SAB de CV, is a Mexico based financial institution engaged in the business of providing banking and credit services to low-income individuals and communal banks.

The company operates in Mexico, the United States, Guatemala and Peru, through its various subsidiaries: Compartamos Banco, a micro-financing bank; Yastas, a network of affiliated merchants that provide payments and financial transactions, Pagos Intermex the payment of family remittances company and Aterna, an intermediary between the distribution channels and the insurance industry.

Gentera is currently listed on the Mexican Stock Exchange with ticker GENTERA.MX and on US OTC Markets with ticker CMPRF. The company is also a constituent of the Mexican benchmark index IPC and leading S&P and MSCI Indices tracking Latin America securities. In last month, shares of the company have declined nearly 18%. YTD in 2017, shares of Gentera lost 17% in value.

3.    Empresas Ica

Empresas ICA is a holding company engaged in civil and industrial construction, real estate and home development, and operates infrastructure facilities, including airports, toll roads, and water treatment systems. The Company operates in five segments: civil construction, industrial construction, concessions, airports, and corporate and others.

Empresas has a significant presence in Mexico, Spain, United States as well as other Latin American countries.

In 2016, the company generated 15% of its revenues from the United States, its largest market outside of Mexico, thereby exposing it to risks in case of termination of the NAFTA agreement.

Empresas is currently listed on the Mexican Stock Exchange with ticker ICA.MX. The company is also a constituent of the Mexican benchmark index IPC and leading S&P and MSCI Indices tracking Latin America securities. In the last month, shares of the company have declined nearly 17%. YTD in 2017, shares of Empresas have lost 84% in value.

4.    Mexichem Sab

Mexican Sab is one of the largest chemical and petrochemical companies in Mexico. The company has a diversified product portfolio ranging from telecom, infrastructure, housing, drinking and water in countries like Mexico, the USA, Europe, Asia, Africa (South Africa), Middle East (Oman), and Latin America.

Mexichem operates under the following business heads: Vinyl, which is involved in the extraction of chlorine, caustic soda and chlorinated derivatives; Fluor, which is focused on the extraction of fluorite, as well as production of hydrofluoric acid and cooling gases; Fluent, which includes the manufacture of pipes and fittings made of PVC, polyethylene and polypropylene, as well as geo-synthetic tubes and connectors, and Energy, which comprises power cogeneration for internal and third-party consumption. The company operates through various subsidiaries across the globe.

In 2016, Mexichem generated nearly 16% of its revenues from the United States, thereby putting it at significant risk to a withdrawal of the NAFTA pact.

Mexichem has been listed on the Mexican Stock Exchange for the past 30 years with ticker MEXCHEM.MX. The company is also a constituent of the Mexican benchmark index IPC and leading S&P and MSCI Indices tracking Latin America securities. In the last month, shares of the company have declined nearly 16%. YTD in 2017, shares of Mexichem have appreciated 9.2%.

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.

Mexican Banking Boom: 3 ADRs Offering High Dividend Yields at Low Price Multiples

Mexico financial sector equity looks attractive from a valuation perspective

Mexican financial sector equities that are part of the iShares MSCI Mexico Capped ETF (EWW) has returned about 33.3% YTD (as of August 10). With YTD returns equivalent to 48.4%, 47.2%, and 45.8% respectively, stocks of Grupo Fin Interacciones, Grupo Financiero Santander (BSMX), and Grupo Financiero Banorte (GBOOF) (GBOOY), are among the top performing stocks within Mexico financial sector equity. Investors in the sector enjoy a healthy dividend yield of 4.5% and a relatively lower price multiple of 2.32 P/B for the sector.

The chart above shows the forward valuations for the MSCI Mexico Financials Index as of August 10. The rising forward EPS trend line clearly indicates a higher earning potential for the sector. However, price expectations, as indicated by the forward price-to-book ratio, are also on the rise. We took a closer look at stocks within the financial sector in Mexico and identified 3 stocks in particular with US-traded ADRs, which enjoy overall favorable valuations. (Returns and performance figures relate to data as of August 10, 2017)

  1. Grupo Financiero Santander México, S.A.B. de C.V. (BSMX)

Grupo Financiero Santander México, S.A.B. de C.V. provides a range of financial and related services to clients ranging from individuals to corporations to government institutions. The Mexican banking group is a subsidiary of Spanish bank Banco Santander.

The bank’s ADR is trading on the NYSE under the symbol BSMX. On a year-to-date basis, the ADR had returned 47.25% as of August 10. The stock trades at an attractive P/B of 2.21 as compared to the peer average of 2.32. Additionally, the stock offers an attractive dividend yield of 7.02%.

  1. Banregio Grupo Financiero, S.A.B de C.V. (BRGGF)

Operating as BanRegio, Banregio Grupo Financiero is a regional bank offering financial and investment products and services in Mexico. The bank’s ADR trades on the NYSE’s OTC market under the symbol BRGGF. On a year-to-date basis, the ADR had returned 16.32% as of August 10. The stock trades at an attractive P/B of 2.74.

  1. Grupo Financiero Banorte, S.A.B. de C.V. (GBOOF) (GBOOY)

Grupo Financiero Banorte or Banorte is a Mexican banking and financial services holding company. The bank’s ADR trades on the NYSE’s OTC market under the symbols GBOOF and GBOOY. On a year-to-date basis, the ADR had returned a whopping 45.87% as of August 10th. The stock trades at an attractive P/B of 2.54. The stock has 73.9% BUY recommendations from rating analysts.

Mexican ADRs To Play If Construction Of Trump’s Border Wall Begins

Construction of the ‘Trump Wall’ begins

The construction of a border wall between the US and Mexico was one of the centerpieces of US President Donald Trump’s 2016 electoral campaign. Now, with engineers having begun the preparatory work for the border wall construction, getting the funding from congress is the last piece to the puzzle. Democrats have shown no sign of yielding on the issue yet, and already blocked the project once during negotiations over a government spending package last spring. However, the White House is pitching a new deal to have the necessary funds included in the budget this fall. If President Trump’s vision does take shape and form, what will investors be watching? If construction work picks up, it should lead to increased demand for construction and material industry products and services.

Consequently, for US investors, ADRs from Mexico’s material sector should command particular attention. The materials sector in Mexico has returned 17.4% YTD (as of August 10), led by Industrias Penoles SAB de CV, Cemex, and Mexichem, which is up 35%, 21%, and 20% respectively. Industry performance has been gauged from stocks that are part of the iShares MSCI Mexico Capped ETF (EWW). Though dividend yield from the sector stands at a dismal 0.79%, an attractive price multiple of 17.97 P/E serves as the high point for the sector.

From an investment perspective, forward valuations for Mexico’s material sector are currently attractive (see chart above), with a lower aggregate forward P/E trend line coupled with a rising forward EPS (earnings) trend line. We identified two stocks within the sector, that could be given particular attention.

CEMEX, S.A.B. de C.V. (CX)

This Mexican multinational building materials company manufactures and distributes cement, ready-mix concrete, aggregates, clinker, and other construction materials. Cemex also offers various complementary construction products and provides building solutions for housing projects, pavement projects etc.

The company has its ADR trading on the NYSE under the symbol CX. On a year-to-date basis, the ADR had returned 20.8% as of August 10. The stock trades at an attractive P/E of 13.83 as compared to the peer average of 17.97. The stock has received 82.6% BUY recommendations from analysts reviewing the stock.

Mexichem, S.A.B. de C.V. (MXCHF) (MXCHY)

Mexichem is a producer in plastic pipes, and one of the leading chemical and petrochemical companies. The company operates more than 120 production plants in over 30 countries and has a market value of about $6 billion. The company recently closed a deal to acquire 80% stake in the Israeli irrigation firm Netafim for $1.9 billion.

The company has its ADR trading on the NYSE’s OTC exchange under the symbols MXCHF and MXCHY. On a year-to-date basis, the ADR had returned 20.25% as of August 10. The stock trades at an attractive P/E of 14.69 as compared to the peer average of 17.97. The stock has received 84.2% BUY recommendations from analysts reviewing the stock.

5 Mexican ADRs With Attractive Valuations Since Trump Entered The White House

Mexican ADRs are commanding increased investor interest

Mexico’s stock market has been commanding increased investor interest ever since President Donald Trump set foot in the White House. His protectionist pledges against Mexico have weighed down the Mexican peso sharply against the US dollar (UUP). Mexican equities on the local stock exchange, as well as listed ADRs trading on the US stock market (SPY) (IWM), had taken a hit. The Mexican equity-tracking iShares MSCI Mexico Capped ETF (EWW) touched its 5-year low ($42.64 a share) on January 16 this year. The Mexico Fund, Inc. (MXF) and the Mexico Equity & Income Fund Inc. (MXE) are other US-listed funds providing exposure to Mexican equity.

Top 5 Mexican ADRs

ADR Ticker Name Sector – Industry P/E P/B YTD Return%
BSMX Grupo Financiero Santander Mexico SAB de Financials- Bank 13.81 2.21 47.25
CX Cemex SAB de CV Materials- Construction 13.83 1.48 20.79
MXCHF/

MXCHY

Mexichem SAB de CV Materials- Chemical 14.69 2.01 20.25
BRGGF Banregio Grupo Financiero SAB de CV Financials- Bank 14.53 2.74 16.32
GBOOF/

GBOOY

Grupo Financiero Banorte SAB de CV Financials- Bank 17.18 2.54 45.87
Note: Returns and ratios relate to data as of August 10, 2017

 

Stock market recovering, economic indicators favorable

However, the markets appear to have recovered from their January abyss now; the EWW is up 30% since January 16 (as of August 10). Moreover, economic indicators seem to be putting Mexico in a favorable light; GDP growth gradually gaining, unemployment is low , inflation has been rising fuelled by consumer spending, and the country’s balance of trade position is substantially better now.

However, Mexican equity still has a long way to go before it sees its market recovering to levels seen before the oil price plunge in mid-2014. The price of oil matters to Mexico as oil revenues make up close to 10% of the Latin American (ILF) economy’s export earnings. The EWW had seen trading in $65-$70/share range until the third quarter of 2014.

US investors seeking bargain opportunities

Now, while Mexican equities take their time to gain pace as they tread northward, long-term investors are seeking out bargain opportunities. For US investors, there are a lot of Mexican companies which have their ADRs trading on the US exchanges. We filtered the list for you, to arrive at the top 5 Mexican ADRs currently trading at the most attractive valuations on the US exchanges. These include 2 companies from the materials sector and 3 from the financial sector (see table above).

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.

Argentina’s Ebullient Stock Market Shrugs Off An Embarrassing Moment, But What Next?

Though there is debate regarding the irreversibility and effectiveness of President Mauricio Macri’s economic reform policies, one aspect of Argentina is beyond dispute: the exuberance of its stock market.

In Argentine peso terms, the Buenos Aires Stock Exchange Merval Index is up 30% in YTD 2017 until July 7. In USD terms, the rise is capped at 22% in the period due to the decline of the peso against the greenback. Meanwhile, the Global X MSCI Argentina ETF (ARGT) is up 27%.

With this performance, it has far outperformed the previously best performing emerging market from Latin America – Mexico – represented in the graph above by the iShares MSCI Mexico Capped ETF (EWW). It has also given tough competition to the best performing emerging markets of this year so far – Poland (PLND) and Greece (GREK).

What lies behind this performance?

The graph below outlines the sectoral composition of the Merval and the ARGT. Apart from Argentine stocks, the latter also invests in American Depository Receipts listed on US exchanges.

The difference between the returns of Merval (in USD terms) and ARGT in YTD 2017 is best displayed by the sectors contributing to their returns. The tech sector has been the biggest sectoral contributor to the ARGT, led by US-incorporated Mercadolibre, Inc. (MELI), although it does not form part of the Merval. The stock is by far the single-largest contributor to the ETF.

Financials follow next, led up by ADRs of Grupo Financiero Galicia S.A. (GGAL) and Banco Macro S.A. (BMA).

Leaving embarrassment behind

Given the plethora of reforms by the Macri government, there was widespread hope that Argentina would be included in MSCI’s Emerging Markets Index from June this year. BlackRock had launched the iShares MSCI Argentina and Global Exposure ETF (AGT) with a view to this inclusion resulting in an appreciable upside for the country’s stocks.

However, MSCI’s 2017 Market Classification Review, though positive for China and Saudi Arabia, caused somewhat of an embarrassment to Argentine equities as the country was left tagged with a frontier status yet again.

It was a case of so close-yet so far for the country as MSCI observed, “Although the Argentinian equity market meets most of the accessibility criteria for Emerging Markets, the irreversibility of the relatively recent changes still remains to be assessed.”

Moving on

Argentine stocks took the MSCI snub in stride though, rather than a sharp negative reaction. This year’s June review was arguably the closest the country has come to regaining its emerging market status since having lost it in May 2009.

Stocks are undoubtedly expensive at this juncture compared to its Latin American peers and investors who have given Argentine equities a miss so far may need to wait until the political situation steadies next May – a consideration we’ll look closely at in the last article of this series.

But before that, let’s look at a development which continues to attract market intrigue: the 100-year bond sale.

Ford Shifting Resources to China Is Good News for This Chinese Automaker

Ford is shifting Focus to China

Chongquin Changan Automobile Company Limited (CQCAF) is among the 222 Chinese stocks that are a part of the MSCI’s simulated list of constituents for inclusion into its Emerging Markets Index (EEM) (VWO) in 2018. Chongquin Changan develops, manufactures, and markets mini cars, mini sedans, full-size sedans, and engines in China (FXI) (YINN) (MCHI). The Chinese automaker currently operates joint ventures with Japan’s Suzuki Motor (SZKMY) (SZKMF) and Mazda Motor (MZDAY) (MZDAF) as well as Ford Motor (F) of the U.S. Recently, a top executive from Ford announced the company will begin manufacturing the next-generation Focus compact car in China, and exporting it from China to North America in 2019, rather than from Mexico (EWW) as earlier planned. (Read, Ford Says Goodbye To Mexico, And Hello To China For Small-Car Manufacturing)

Security Name Ticker Mkt Cap ($bn) Fwd EPS Fwd P/E Analyst Rating Sector- Industry YTD Return
Chongqing Changan Automobile Co. Ltd. (CQCAF) 000625        64.22 2.35 3.7 4.2 Consumer Discretionary- Automobiles -4%
Data as of date June 19, 2017, Returns as of July 3

 

The move would save the company about $500 million as the company would only have to retool one plant (its existing Focus factory in Chongqing) as opposed to the two renovations that would have been required in Mexico. By any measure, this is favorable news for Chongqing Changan Automobile, which is Ford’s JV partner in China.

Foraying into artificial intelligence

According to a recent declaration made by Chongquin Changan’s vice president, Yuan Mingxue, the company will invest $3.09 billion (21 billion yuan) in artificial intelligence over the next decade. The company has already partnered with Silicon Valley startup accelerator Plug and Play Tech Center and Baidu (BIDU) as part of its vision. With its foray into artificial intelligence, the company intends to double sales from 3.06 million vehicles (2016) to 6 million vehicles by 2025.

Valuations

The Shenzhen-listed stock (000625) is down 4% YTD (as of July 3). Over a 5-year period, however, the stock has returned 25.5% on average. On a relative basis, its blended forward P/E stands at 3.7x, while the mean of blended forward P/E’s of its competitors stands at 7.8x. The stock is therefore trading attractively as compared to its competitors.

Consensus analyst ratings hold the company at a 4.15 score with 60% of analysts with a BUY recommendation, and 40% with a HOLD recommendation.

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.

Last To the Party: Colombia Could Turn A Corner After Its Slowest Quarter Since 2009

Though Late, Colombian Stocks Have Joined the Emerging Markets Rally

Up until very recently, Colombian stocks told an underwhelming story of late. As recently as May 4, the MSCI Colombia Index had risen just 3.6% for the year, garnering limited attention at a time when the Emerging Markets Latin America Index was up 10.7%, and the broader Emerging Markets Index had gained 13.7%.

However, since then, things have changed quite a bit. So much so, that the Colombia Index was up 11.25% as the month of May drew to a close. The country has now bettered the Emerging Markets Latin America Index, which was up 9.6% in the same period.

ETF performance

The recent rise in Colombian equities merits a closer look at the following ETFs:

  • iShares MSCI Colombia Capped ETF (ICOL)
  • Global X MSCI Colombia ETF (GXG)

Financials, utilities, and materials, in that order, have helped these two funds post their double digit gains this year.

While the regular and preferred shares of Bancolombia S.A. (CIB) have helped ICOL, the sponsored ADR has powered the GXG.

The utilities sector across both funds has been led by Interconexión Eléctrica S.A. E.S.P. (IESFY). The company’s stock had reached an intraday high of 13,900 pesos on May 26 – a level not seen since January 2011 – due to reduced regulatory risk.

View on Colombian stocks

Colombian ETFs have not yet attracted significant investor interest from the US. Though the Colombia-listed iShares COLCAP Fund, the first and largest local equity ETF available in Colombia to all investors, has attracted inflows worth $150 million in YTD 2017, the two US-listed ETFs have only attracted a combined $1.5 million with GXG attracting $822,500 YTD according to Bloomberg data.

The ICOL is only slightly more expensive than the iShares MSCI Brazil Capped ETF (EWZ) but much cheaper than the iShares MSCI Mexico Capped ETF (EWW). While Brazil is undergoing a political crisis, Colombia has been making progress on its peace deal with rebel group FARC.

Macro economically, the country’s economy rose just 1.1% in Q1 2017 – the slowest pace since 2009 – mostly due to the fact that mining production shrank by 9%. However, many are considering this to be a bottom for the country as construction activity is expected to pick up. If oil prices remain firm, they will also help the economy.

Meanwhile, there are mixed views from analysts regarding Colombia stocks. According to reports by Bloomberg, HSBC analysts have added CIB to their model Latin American portfolio. On the other hand, Citigroup has kept Colombia at ‘underweight’ citing that it is “too hard to find conviction ideas at reasonable prices.”

For investors taking the ETF route, the broad-based ETF basket would help mitigate risks that come along with investing in individual stocks.