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.