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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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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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.

Emerging Market Bonds: Why JP Morgan and Amundi Are Fleeing Asian Markets

Amundi does not find Asian bonds attractive

Emerging market (EEM) (EMB) fund managers are increasingly fleeing Asian bonds and piling into Latin America (ILF) and Turkey (TUR) local currency debt (EMLC) (LEMB). Abbas Renani, global emerging markets strategist at Amundi Asset Management, does not find Asian bonds attractive currently. He prefers Latin America and Turkey bonds.

The yield difference is huge

Data reveals that the yield difference is substantial in some cases. Turkey’s 10-year benchmark bond is currently offering a 10.37% (as of May 15). From Latin America; Brazil’s (EWZ) is at 10.08% and Mexico (EWW) at 7.2% and Colombia (ICOL) at 6.3%. On the other hand, 10-year bonds of popular Asian markets (AAXJ) such as China (FXI), Thailand (THD), South Korea (EWY), and Malaysia (EWM) are offering 3.7%, 2.5%, 2.3%, and 3.9%, respectively. Moreover, China’s debt situation continues to pose a tail risk to Asia.

Exceptions within Asia: India & Indonesia

“In Asia, the only currencies that we do like are India (EPI) and Indonesia (EIDO),” said Renani. “We want to allocate to countries with the highest opportunities, not just countries with good opportunities.”

India’s 10-year sovereign bond is currently trading at a 6.8% yield. Indonesia’s is at 7.1%. From a currency perspective, India and Indonesia present an opportunity for bond (BND) (AGG) investors. So far in 2017, the Indian rupee and the Indonesian rupiah have been appreciating against the greenback. The Indian rupee has strengthened by about 6% against the US dollar (UUP) (between Jan 2 through May 15), while the Indonesian rupiah has strengthened by 1.65% during the same period. Strengthening currency presents an opportunity for foreign portfolio investors to gain exposure to local debt.

JP Morgan’s Amoa shares the same view

Diana Kiluta Amoa, senior portfolio manager on the local-currency team at JPMorgan (JPM) Asset Management, also likes emerging market local–currency bonds as they’re currently relatively inexpensive considering a weaker dollar. Among emerging markets, Amoa is particularly bullish on Argentina (ARGT), Mexico (EWW), Brazil (EWZ), and Turkey (TUR). Again we see a tilt towards Latin America (ILF) and Turkey from yet another prominent fund manager here.

Why Citigroup, Barclays and Goldman Sachs See Opportunity In Middle East Banks

Middle East banking is becoming attractive for multinationals

Middle East nations (GULF) are in the process of casting away their dependence on oil and are opening up their country for foreign investments. As part of this plan, Aramco, the largest state-owned oil producer in Saudi Arabia is launching its initial public offering. The Saudi government intends to offload 5% of the company’s stake in a 2018 listing. In 2015, the Saudi Stock Exchange Tadawul (KSA) opened up to foreign institutional investors for the first time. Around 160 companies are listed on the Saudi Arabian stock exchange, covering 15 industries.

Some of the world’s largest banks, Goldman Sachs (GS), JPMorgan Chase (JPM) and Citigroup (C) are redirecting their interests in Saudi Arabia, and this is not restricted merely to retail or commercial banking. The financial world is looking towards the Middle East to earn yields on their investments.

Citigroup is planning to re-enter Saudi Arabia and is seeking an investment-banking license for operating in deal making activity. Citigroup had exited the country in 2004. Further, Goldman Sachs is also negotiating to obtain a license for equity trading in the country.

Barclays’ (BCS) Chairman expects consolidation in the financial services sector in the Middle East region will drive dealmaking activity for investment banks. “We might expect to see more transactions from the region driven by the need to consolidate or monetize non-core assets,” he mentioned in an interview to Bloomberg.

Domestic banks in the Middle East are currently consolidating. Recently, the National Bank of Abu Dhabi and First Gulf Bank merged together to create UAE’s largest bank. Meanwhile, Qatar based banks Masraf Al Rayan, Barwa Bank and International Bank of Qatar also announced plans of a merger in 2016. Domestic arms of HSBC and Royal Bank of Scotland are also exploring the possibility of a merger which would create Saudi Arabia’s third largest bank with an asset base of $78 billion.

JP Morgan’s Rollercoaster Ratings In Indonesia Following Government Tantrum

Two steps down and one step up in two months

JPMorgan Chase (JPM) has upgraded its view on Indonesian equities (EIDO) (IDX) to “neutral,” one notch above its “underweight” rating. The interesting bit is not the upgrade itself but the fact that it occurred just two months after a downgrade. In November 2016, JPM had downgraded its view on the country’s stocks by two notches from its “overweight” grade.

The downward move was announced following the victory of Donald Trump, which was expected to lead to outflows from emerging market equities with JPM expecting Indonesian equities to take a bigger beating than other emerging market peers.

What followed as a backlash to the downgrade was the Indonesian government suspending all business activities with JPMorgan Chase. This meant the government put an immediate halt to using the bank’s services as a primary dealer and underwriter for its bond issuances.

The Financial Times reported that Indonesia’s finance minister Sri Mulyani Indrawati justified the ban on business with JPM by stating last week that the downgrade “provoked irrational behavior.”

Independence versus business

Though the Financial Times reported that a spokesperson for JPM “denied there was any link between Indonesia’s rebuke of the bank and the change in its analysts’ views,” it would be exceptionally difficult to prove or believe this.

If the analysts had indeed believed that improved fundamentals would help Indonesia minimize the outflows caused by a Trump victory, they would not have downgraded the country’s equities by two notches in November in the first place. Meanwhile, if Indonesian equities did react excessively negatively to the election of Trump, then they could have effected two separate downgrades as the situation deteriorated.

The instance has subsequently raised questions surrounding the independence of ratings in Indonesia. Though the impetus for the successive moves is not conclusive, it does illuminate another situation where politics are just as important as economics to watch for market outcomes.