Peru’s New President Calls for Social Revolution in Search of the Next ‘Peruvian Miracle’

President Kuczynski is shaking up Peruvian politics with a roll-up-your-sleeves approach to reviving economic growth. His rhetoric could reverberate throughout a divided Latin America.

Peru’s new President, Pedro Pablo Kuczynski, hit the ground running — literally. Before his first cabinet meeting, PPK (as he is popularly known) took his cabinet to a fitness workout session in front of Palacio de Gobierno, seat of the country’s executive branch. He intended to show the commitment of his administration to sports and health, but also to send a very graphic message to the political establishment: Peru is ready to shake things off.

A few days earlier, Kuczynski made his inaugural address calling for a social revolution. With 23% Peruvians now living below the poverty line, he vouched to modernize the country, fight corruption, reduce income inequality and provide access to basic services for all. To support his ambitious social program, he intends to improve the country’s business environment, boost foreign investment and increase public spending. Nevertheless, he will have to face fierce political opposition and a sluggish economy after a decade of the Peruvian Miracle. He aims to put economy back on the 5% GDP growth mark by 2018.

The Kuczynski Reforms

Kuczynski defeated Keiko Fujimori — daughter of former president Alberto Fujimori, who is now serving a 25-year prison sentence for corruption and crimes against humanity — in a run-off by a 39,000 vote margin. With Fujimori winning the first round, he had to mobilize the left and the anti-fujimoristas, which he successfully did by harnessing the widespread dissatisfaction with old fashioned politics.

Yet, his party, Peruvians for Change, obtained a meager 18 seats in the parliament, while Popular Force, Fujimori’s party, will control the house with an overwhelming majority of 78 out of 130 seats. In a unicameral parliament, the new government will have to find a happy medium with an embattled opposition to enact its reforms.

After a remarkable growth burst (an average 6.4% between 2003 and 2013) largely fueled by the commodity boom, the country’s economy seems to be losing pace. The slowdown is due to the falling prices of gold and copper (half the country’s exports), but also, in a large part, a result of Peru’s inefficiencies. To start growing again and reduce the country’s reliance on volatile commodities, the new president has proposed bold reforms to unleash a new cycle of growth.

Kuczynski plans to tackle endemic corruption and red tape, two of the most pressing issues hindering investment and growth. Moreover, he will concentrate on changing rigid labor laws — a business-sector complaint that has led to nearly two-thirds of Peru’s workforce being hired informally. The crackdown on informality is one of PPK’s main platforms to curb tax evasion, increase income, and pay for tax breaks aimed at attracting foreign direct investment. He has set a bold deadline: by the end of his term in 2021, 60% of jobs will be on the books.

Together with the tax cuts, he also plans to increase public spending on strategic infrastructure projects to stimulate the economy. Kuczynski says he will unlock some $20 billion in investments in mining and energy. He also intends to spend another $15 billion on projects to achieve his goal of providing access to water and sanitation to all Peruvians. To that end, he created a new Ministry of Regional Support focused on improving the efficiency and increasing control over public spending. Additionally, the Peruvian investment promotion agency, ProInversión, will be decentralized to reduce project time frames and make them more adapted to local needs.

Kuczynski and the future

To finance all this, PPK will rely on the country’s low public debt— which will give him room to spend — and a solid credit rating. During the campaign, Kuczynski had already garnered support from foreign investors eager to finance his plans. Furthermore, the country has accumulated a remarkable stock of foreign currency during the golden days of commodity bonanza, which could also be used to pay for the projects.

Getting the parliament on board may be easier than predicted, since raising public spending is one the few policies where PPK and Fujimori’s opinions converge. To speed up the process, the administration will very likely favor public-private partnerships, increasing the opportunities for foreign investors.

Kuczynski’s victory over Fujimori has been widely applauded by international markets — mainly because he represents the maintenance and improvement of the business-friendly policies implemented by his predecessor. Yet, most of the public — and many analysts — remain skeptical about the viability of his minority government and his capacity to unite Peru, criticizing him for being an out-of-touch representation of the country’s upper-class.

Indeed, PPK is an outsider, and his biography epitomizes a cosmopolitanism which very few Peruvians can relate to. He was educated at Oxford and Princeton, worked for the World Bank and Wall Street, and has close family ties with Jean-Luc Godard and Jessica Lang. More tellingly, he had to renounce his American citizenship to run for president.

Nevertheless, his genial and spontaneous style seems to be pleasing the public and bringing new life to a job normally seen with contempt and disregard by Peruvians. Despite the remarkable economic performance of recent years, presidents have been consistently rated poorly. Recent president Ollanta Humala left office with an approval rating of 19%, even with an expected GDP growth of around 4% for this year.

More importantly, Kuczynski’s victory is mainly due to an unexpected alliance with the country’s left — something unseen in Latin America — and the possible birth of a new non-partisan approach to a continent rapidly plunging into polarized politics. How he will conduct negotiations with the opposition and if he will eventually succumb to traditional patronage remains to be seen.

Still, his resolve to get things done, decentralization push, and anti-corruption rhetoric could reverberate among the continent’s increasingly restless and discontent population. Beyond a mere antithesis to the declining leftist reign in Latin America, Kuczynski might well be the leader the region so badly needs.

Caio Pizetta Torres is the Chief Institutional Relations Adviser – Department of International Relations, Government of the State of Rio de Janeiro

As originally appears:

Biggest Winner of Peru’s Election Will Be Foreign Retail Investors

No matter who prevails in yesterday’s presidential runoff in Peru, the big winners are the population as a whole and the foreign retail investor. The two leading contestants, Keiko Fujimori, the daughter of the disgraced former president, and Pedro Pablo Kuczynski, are both viewed as market-friendly and center-right politically. For the first time in many years there was no leftist candidate on the ballot.

There is a wide age gap between the two candidates, with Fujimori at 40 and Kuczynski at 77, but both come with their own baggage. The fear with Fujimori is that she will return the country to the days of her father’s rule and all the corruption that came with that. On the other hand, Kuczynski still has a U.S. passport, was a member of the World Bank, and has close ties to Wall Street.

For some, the Wall Street connection is viewed as a negative. Another difference could be in governing styles, with the concern that Fujimori would re-impose her father’s authoritarian governing style, though she has signed a pledge promising to respect human rights and fight corruption. Kuczynski has a very high favorability rating and as he is a newcomer on the scene, there really is no benchmark other than he is viewed as being a pragmatist.

 As far as investing is concerned, if you, like me, believe that commodities are on the edge of a bull market, then Peruvian stocks may be a good bet. The country has the second largest copper deposits, the fifth largest gold reserves, and is in the top five worldwide producers of lead and zinc. All these commodities have recently had good run-ups and may continue.

The iShares MSCI All Peru Capped ETF (EPU) has a year to date return of 48.49%. But stocks involved in the mining and processing of gold, zinc, and silver will be a better investment, such as Cia de Minas Buenaventura SAA (BVN) with a year to date return of a whopping 151%, or Hochschild Mining PLC (HOC:LN), up a dramatic 212% year to date.

For a little diversity an investor can take a look at Cementos Pacasmayo SAA (CPAC), a construction company that also sells quicklime for use in mining operations and is up 18.81% year to date. And lastly, Grana y Montero SAA (GRAM), a holding company involved in infrastructure and energy that is also up nicely year to date at 125% return.

GDP growth in the first quarter of 2016 came in at 4.4% which is down slightly from the previous quarter; however, with the election over, I believe the economy is well positioned because of the rally in commodities.  I for one am a buyer, because Peru and South America are successfully turning back the pink tide and I believe that this will continue for many decades to come.

 Peter Kohli, CEO of emerging market specialist DMS Funds.

Dolls And Dogs: Our List Of Emerging Markets To Invest In (And To Avoid)

With one-third of 2016 already behind us, we review the major stock market indices in frontier and emerging countries. Where were the returns strongest – and more importantly, what are the best ways for investors to get involved?  

After a long period in the darkness, investors in emerging markets have lately had reason to perk up.

Contrast that with last year, when global equity investors had few places to hide. US markets barely broke even in nominal terms, and even incurred a small loss when factoring for inflation. Pain was evident in other developed markets, as major European indices also ended the year lower. Yet these lackluster performances paled in comparison to the bloodbath in emerging markets. Note the comparisons below, as displayed with the most liquid ETFs that track each relevant index:

2015 Performance (%)
SPDR S&P 500 ETF Trust
Vanguard FTSE Europe ETF
iShares MSCI Emerging Markets Indx ETF
iShares MSCI Frontier Markets 100 ETF
Data calculated as of market close on 5 May 2016

The opening days of 2016 saw that malaise transform into outright fear, as January proved to be one of the most brutal months in recent memory. US Fed Chairwoman Yellen’s decision to raise US rates at the end of December (an ill-advised tactic, as I wrote back in October) sparked a rush for the exits of stock exchanges around the globe. US and European markets lost nearly 10% of their value, while the carnage in major emerging and frontier indices was even worse.

Source: Bloomberg


There is an old market adage: “As goes January, so goes the market.” Yet an interesting trend has played out since that Fed-inspired selloff. Most major indices traded lower in February, then moved higher and are now positive for the year.   (Of course the exception to this rule is Europe, which is grappling with a most likely insurmountable heap of problems – most of them self-inflicted).

But most of the emerging and frontier markets rallied from their mid-January lows and have never looked back. In fact, despite a fierce selloff this week in the emerging markets (note: nearly 25% of EEM’s holdings are in Chinese equities, where many large institutions cut their holdings this week) both of these indices have outperformed those tracking the US and Europe.

So what is driving these gains? Unfortunately it isn’t economic growth, as few countries expect to produce higher growth rates in the current year.   Instead, investors seem to be rotating back into emerging market currencies which have been heavily sold in recent months. Remember last year when the ‘smart money’ was forecasting an unprecedented dollar bull market as the Fed began to raise rates? Take a look at this chart for UUP (an ETF that seeks to track the Dollar Index):

Emerging Markets to Invest In


Here’s a question for the technical traders out there: If this chart were for a stock, would you want to own it? (Hint for non-traders: No).

Investors have begun to realize that the Fed has painted itself into a corner, with no conceivable way to follow up their rate-raising rhetoric with action. Consequently, emerging market currencies have been on a tear as investors move back into bonds issued by developing countries in an increasingly desperate search for yield:

Emerging Markets to Invest In


Of course much of this growth can be attributed to ‘bottom-fishing’. This year’s winners are the same countries where investors sold off every asset class a year ago. Factors that contributed to the selloff were quite serious – Western sanctions (Russia), unprecedented corruption and scandal (Brazil), and presidential incompetence (South Africa), and the fear was compounded by a commodities bear market in reaction to waning demand from China.

It is quite possible – likely, even – that emerging markets investors are in the midst of a bear-market rally. There certainly are few macro fundamentals that can spark excitement – in any market. Nevertheless, as another old adage goes, “There’s always a bull market somewhere” – an old saw that has stuck with me ever since I watched the Sri Lankan stock index increase over 125% in 2009, while the rest of the world was self-immolating.

With that in mind, let’s take a look at the five best – and five worst – equity market indices in the emerging and frontier market spectrum so far this year. We track all indices that are included within the MSCI country classification list for frontier and/or emerging markets. We’ll also take a look at ETFs or ADRs that are a generally accepted way for investors to get direct access via one of the US stock exchanges.

As you can see, Latin America is dominating the field:

The Five Best

MSCI Classification
Primary Index
S&P/BVL Lima General Index
Ibovespa Sao Paulo Brazil
Buenos Aires SE Merval Index
Casablanca MASI All Shares Index
Colombia COLCAP Index
Source: Bloomberg 

Peru: Amidst an ongoing presidential election, the Lima Index went near-vertical in early April after the reigning leftist candidate failed to secure enough votes to qualify for a runoff.

Best equity plays: iShares MSCI All Peru Capped Index Fund (NYSE: EPU).  For ADRs, Southern Copper (NYSE: SCCO) is a US-listed copper miner that generates 43% of its revenues in Peru).

Brazil: No tangible bull case here, other than it has been oversold amidst the worst recession in a century and the unprecedented Petrobras scandal. A slight bump in depressed oil prices have also contributed. Look for a further rally if the Senate pushes out lame-duck president Rousseff later this month.

Best equity plays: iShares MSCI Brazil Index ETF (NYSE: EWZ). Honestly, there’s not much to love here.

Argentina: We currently receive more enquiries about Argentina than any other frontier market, except Iran. This is a definite value play – after years of financial isolation the country just closed its first bond offering in over a decade, and is about to proceed with its first IPO. As we’ve written previously, though, it pays to be cautious here.

Best equity plays: Global X MSCI Argentina ETF (NYSE : ARGT). Some interesting ADRs include integrated oil company YPF (NYSE:YPF), Banco Macro SA (NYSE:BMA) and Grupo Financiero Galicia (NASDAQ:GGAL).

Morocco: The tiny Casablanca Stock Exchange’s All-Shares Index has been on a tear over the past two weeks. Positive sentiment is building in the North African country after Bank of China announced it would base most of its African operations there.

Best equity plays: Not easy for US investors. No Moroccan companies carry ADRs; the closest proxy is the WisdomTree Middle East Dividend ETF (NYSE: GULF) which currently has a 13% weighting in Morocco. Its largest holding is Maroc Telecom, at 10% of total weighting.

Colombia: Coming off a very bad year in 2015, underpinned by the one-two punch of high inflation and lower commodity prices. Higher prices for oil have helped to ease investors back into the Bogota Stock Exchange, while US real estate investors are beginning to discover opportunities here.

Best equity plays: Global X MSCI Colombia ETF (NYSE: GXG); ADRs include Bancolombia SA (NYSE: CIB) and Ecopetrol SA (NYSE: EC).


And finally, let’s take a look at the worst-performing frontier and emerging markets so far this year. Remember that volatility is generally higher in emerging markets, and particularly in frontier markets. Today’s dog could be tomorrow’s darling, and vice versa:

The Five (Actually Four) Worst

MSCI Classification
Primary Index
Ukraine PFTS Index
Ghana SE Composite Index
Nigerian SE All Share Index
Shanghai SE Composite Index
Shenzhen SE Composite Index
Source: Bloomberg

Most of the names on this list are widely expected, as we show here:

Ukraine: No explanation needed. Rampant inflation, non-existent economy, and did I mention a low-intensity conflict on its eastern flank? I’ve been hearing about opportunities on the ground for the truly adventurous, but that’s about it.

Ghana: Weak currency, coupled with rising inflation. The Ghanaian economy has begun to show symptoms of ‘Dutch disease’ as government revenues move to support recent oil discoveries while leaving other industries to rot.

Nigeria: Take the Ghana explanation mentioned above, and ramp up the intensity by 10x. The current president is resisting calls to devalue the currency, the naira.

China: This is the proverbial ‘elephant in the room’ – not just for emerging markets, but globally. Stocks in the world’s second-largest economy have sold off aggressively this year amidst speculation of looming corporate bond defaults and concerns over economic growth. Continued weakness here may begin to spill over into the global economy.

In conclusion, a prudent investment strategy with regard to emerging and frontier markets might include the following:

  • Consider weighting more heavily toward EM and particularly selected FM as dollar weakness continues to push assets into these markets.
  • Region, and even country, selection remains important. Keep an eye on Latin America – but beware the siren song of the bear-market rally.
  • Keep an eye on the data. Much of the recent gains have been driven by value investors picking up oversold assets. Without clear indicators of actual economic growth, this rally may be short-lived.

Kevin Virgil is the CEO and co-founder of Frontera.

Copper’s Comeback Kid: Peru Leads the Field of Emerging Markets to Watch

Remember the excitement over Peru?

In the previous decade, its main stock index outperformed every other equity market in the world. Its copper-fueled economy seemed unstoppable. Headlines enthused over an emerging middle class spending money in shopping malls and Lima’s hot new restaurants and night clubs.

But the crash in commodities in the current decade put paid to all of that. Foreign companies once lauded for helping build roads, schools and health clinics became the enemy. Deadly protests, the likes of which had not been seen since the military took power in the 1960s, flared up against one Chinese mining venture for failing to create more jobs and protect the environment. The heavy-handed military and police response provided further deterrence to once-bullish investors.

Now, it seems, good times may be returning to the Andes. This year Peru’s equity market index is once again the world’s best performing, with a rally of over 34% so far in 2016.

With the country in the midst of presidential elections, the lofty stock market performance belies the political tensions. Both presidential contenders are pro-business and free markets. Keiko Fujimori is the conservative daughter of a jailed former authoritarian president. Pedro Pablo Kuczynski is a centrist ex-World Bank economist.

Peru’s stock market rallied the most since 2008 as the two candidates defeated leftist Veronika Mendoza in the first round of voting earlier this month. Runoffs for the presidential race will take place in June.

But there’s another reason for taking a look at Peru. It’s harvest time. Not for farmers – but investors.


“Peru is a case of making hay with the grass that you’ve sown a few years ago,” Kieran Curtis, a fund manager overseeing $1.3 billion of emerging market debt assets for Standard Life, says on this week’s Emerging Opportunities show.

“A few years ago it was all about investment, and then the investment began to slow as the projects being funded were nearing completion. That meant a drop in economic growth, and somewhat of a change in market sentiment around Peru. But now these projects are actually completed. They’re starting to produce.”

Most of the production is in copper, Peru’s largest export. By the end of 2017, those projects will increase Peru’s production by almost 90% when compared to the third quarter of 2015.

Such a big jump in exports can normally be expected to drive returns for foreign buyers of local currency. That adds to the allure of domestic bonds, with 10-year yields having reached 7.5% this year, while inflation has been around a third of that level at 2.5%, says Curtis, who holds an outsize amount of Peru’s bonds.

Here are some of Curtis’s other top picks, along with countries where he recommends caution:



Indonesia: Changes to coalitions in Congress last year gave President Joko Widodo much more strength to push through his agenda.

We’ve seen a fall in inflation, which has certainly helped market sentiment and enabled some rate cuts from Bank Indonesia.

But we’ve also seen the government expedite infrastructure spending that Indonesia has needed badly for a long time.

We got our first evidence of this in the first quarter, when government capital expenditure was actually up 300% from the prior year.

Bridge to Nowhere, Samana Bay, Dominican Republic

Dominican Republic: We can get very high yields on domestic assets, in the region of about 10%. And this is for a country that has quite low debt.

Government debt is in the range of 30 percentage-points of GDP, and inflation is in the very low single digits.

The Dominican Republic has been enjoying very strong growth recently, because there’s been some heavy investment in the not too distant past.

The country is enjoying the benefits of investment in tourism. This has been growing strongly because capacity has been added in cruise ship terminals and in hotels.

Then there’s also gold mining. One of the largest gold projects came online a couple of years ago, so that’s driven export revenues as well.

The Sehzade Mosque in Istanbul, Turkey. It is sometimes referred to as the “Prince's Mosque”.

Turkey: There are positives and negatives being created on a daily basis in Turkey.

Potentially, one positive is the Cyprus peace deal, which many people expect might be achieved by year-end.

But really, what concerns us is the structure of financing for the economy. The government has been very careful with its own debt and has paid down as much debt as it can, and has been very fiscally conservative.

But the private sector has borrowed a lot, and actually, if you look at the growth in credit as a share of GDP – the change in that ratio – Turkey is second only to China in the emerging world.

So, this has basically led to Turkey being probably the most vulnerable emerging market to, say, a change in Fed policy to a more aggressive stance, changes in liquidity and foreign-currency funding markets.

Listen to the show here

A Possible Downgrade In Peru Fails To Tell The Whole Story

In the first decade of this century, Peru’s IGBVL (Indice General de la Bolsa de Valores de Lima) was the world’s best-performing equity index with a whopping 845 percent return.

Fortunes have fallen hard in the past half-decade. By the end of September MSCI, the investment research firm, is expected to make a decision as to whether Peru will be downgraded from ‘emerging’ to ‘frontier’ status. The exchange is under scrutiny for a number of reasons, not least of which are low liquidity levels. Nor has the global commodity selloff helped matters; Peru’s equity market is deeply weighted in the mining sector. Alonso Segura, Peru’s finance minister, visited MSCI’s New York offices in early September. Speculation is rife that the visit was an attempt to sway opinions away from a downgrade.

What makes this drama interesting is that Peru’s economic performance thus far in 2015 has been markedly better than most of its neighbors. In early September, Peru’s central bank surprised many when it raised interest rates amidst worrying signs of inflation, effectively reversing a cut made in January. Higher rates could help stem a capital outflow in the event of an MSCI reclassification, which the bourse estimates could result in up to US$5 billion of capital flight within three months. With Peru’s index down nearly 30 percent this year, many investors say the potential for reclassification has already been priced in.