By Martin Hutchinson
I have to admit it: When it comes to investing in such emerging markets as Latin America, I’m generally a cynic.
It’s partly because of my experiences as a young banker there in 1979-82. But I’m just as troubled by the mad optimism that goes around Wall Street every time some even remotely plausible government comes to power and takes over somewhere in that region.
One such example: Argentina in 1991-95. I find myself saying: “Guys, you know the place has defaulted every 10 years since the 1930s, so what makes you think it will be different this time around? Make them prove it!”
In Argentina’s case, just as I expected, the new regime didn’t “prove it,” and defaulted again in 2001.
There’s a message there: Don’t get seduced by the “recovery” of the last few years. Much of Latin America always does well in commodities booms, but then it spends more than it earns, maxes out its credit cards, and then looks round for more foreign investors to loot.
Even Mexico has had governments that have looked responsible, democratic and committed to the free market since at least 1994. Yet, the country’s labor productivity increased by only 0.3% annually from 1994 to 2007.
Meanwhile, Petróleos Mexicanos (PEMEX) is watching its oil output decline more and more rapidly, as the government fails to take any real steps to privatize it and bring in badly needed foreign expertise.
Add in the false recovery of Argentina, the total disasters of Venezuela, Bolivia and Ecuador, and the sad, gradual backsliding in Chile, and you can see why many investors shun the entire continent in favor of looking somewhere else.
There are two exceptions:
- Brazil, which in 2002 looked pretty well indistinguishable from its hopeless neighbors, yet since then, under socialist Prime Minister Luis Inacio Lula da Silva, has put up a record of decent growth, reduced foreign debt and established an effective monetary policy that has controlled inflation. It could still go horribly wrong, but Brazil is currently a place where sensible people should put some money, with some good opportunities.
- And Colombia, which had to navigate a very tough decade during the 1990s, with narco-terrorism running rampant. But since the arrival of Alvaro Uribe as president in 2002, it has done much better. Even over the longer term, Colombia’s productivity growth rate since 1980 was greater than 1.0% annually, compared with a pathetic minus 0.3% in Mexico, and an even worse negative 0.7% in the spectacularly badly run Venezuela. Even Brazil, with its upbeat story, averaged only 0.2%. We’re not talking East Asian growth rates here, but Colombia’s long-term record is the best in Latin America.
Short-term, the picture is even brighter. Colombian “real” gross domestic product (GDP) growth was 7.0% in 2007, or about 5.6% per capita. In 2008 and 2009, The Economist expects growth of about 4.0% to 5.0% in each year, but that’s still enough for a smart improvement in living standards.
Inflation is currently running at 6.7%, perfectly acceptable in a global commodity price boom, while short-term interest rates are almost 10.0%, well above the inflation rate, showing that Colombian monetary policy is sufficiently tight to bring inflation down – rather than pushing it along, as most other countries are currently doing.
Its payments balance is minus 2.5% of GDP and its budget deficit is 1.0% of GDP, both perfectly acceptable figures. Finally, Colombia ranked 68th on Transparency International’s 2007 Corruption Perceptions Index – not wonderful, but above all four of the so-called “BRIC” economies (Brazil, Russia, India and China).
In terms of products, Colombia’s principal exports are oil, coffee, apparel, flowers and minerals. Its oil exports are double its imports and – unlike its neighbor, Venezuela – it is welcoming foreign oil companies, which are investing heavily and are now finding more reserves than are being depleted annually. Colombia is friendly to the United States, also. Indeed, the United States is its largest trading partner, and the two countries currently have Free Trade Agreement pending Congressional approval.
The bottom line is this: While Colombia’s growth rate is only moderate, it has under President Uribe been the best-run country in Latin America, and has benefited economically from this. Uribe’s second presidential term expires in 2010, but he remains popular, and the betting is that he will pass the baton to a like-minded successor.
The bad news for investors is that not many Colombian companies are quoted in New York, and the market represents too small a part of the global total to have an exchange-traded fund (ETF) all to itself. The IGBC General Index of Colombian shares is down 20% from its 2006 high, but is up 350% over the last five years. The SPDR S&P Emerging Latin America ETF (GML) invests in Colombia, but that country represents only around 10% of the fund’s overall holdings, and it also has holdings in other far less attractive countries.
The only Colombian company with a full American Depository Receipt (ADR) listing is Bancolombia SA (ADR: CIB), the country’s largest bank-holding company. The stock is attractively priced, with a forward Price/Earnings (P/E) ratio of around 9.0 and a dividend yield of 3.7%.
Other Colombian companies whose shares trade as “Pink Sheet” stocks include Corporacion Financiera Colombiana SA (Pink Sheets: CRPFY), a bank stock that seems to be a reasonable value with a P/E of 11 and a dividend yield of 8.0%. Then there’s also Interconexion Electrica SP (Pink Sheets: IESFY:PK), an electric utility that seems a bit expensive at 30 times earnings. However, Interconexion is expected to undergo a privatization sale by the government in 2009, which may make it both more liquid and a better value.
Both Financiera and Interconexion trade infrequently in the United States, but they are fairly liquid if you can get your broker to buy the shares on the Bogota Stock Exchange.
More one to watch than one to pile into immediately, but a modest investment in CIB (Bancolombia) would seem a good safe bet.
News and Related Story Links:
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Money Morning Investment Analysis:
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When Corruption is Low, Your Profits are High.
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Special Report: Hit the BRICs for a Global-Investing Double Play (Part II: India and China).
American Depository Receipt.
Money Morning Personal Finance:
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Bogota Stock Exchange Listings.
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