LatAm report 3: Peru rewards risk-takers

Analysis of return data and comments from Latin America fund managers suggest Peru is a market that should be on the shortlist of risktakers.

Peru’s natural environment continues to be a source of wealth. Like much of Latin America it has gained from the ongoing strong cycle in commodities prices. Known several hundred years ago for its silver and gold mines and the wealth of the indigenous Inca culture, the country managed to achieve growth above 8% in 2010 and above 6% in 2011, helped by growing private investment and diversification.

Over the past half-decade, the country has benefitted from an ongoing commitment to trade deals. These have been signed with the US, Canada, Singapore, China, Korea and Japan. Negotiations have been concluded with the European Free Trade Association (EFTA) and Chile, while talks have been ongoing with Central American and other countries.

The country’s US-Peru Trade Promotion Agreement entered into force on 1 February 2009, leading to more trade and investment between the countries. Asia is a key region with which trade deals are being developed – partly reflecting the historical and family links to the region. Former president Alberto Fujimori is of Japanese descent.

“The domestic economy offers compelling medium term growth prospects, driven by numerous factors which includes rising investment, a growing middle class and greater financial penetration,” said Will Landers, portfolio manager of the BlackRock Latin American Investment Trust.

“Within the domestic economy, we have holdings in the banking and infrastructure sectors. The banking system is very profitable, well capitalized and has amongst the highest growth rates across Latin America. Within the mining industry we find interesting opportunities within gold, but limited interest outside of that. We are also able to access sectors such as telecoms and retail through companies listed in the Chilean market who have significant operations in Peru.”

The opportunities identified by Landers also show in the data both for the market generally, but also Peru-domiciled funds specifically – for those willing to take the risk.

Figures from FE show that in gross euro terms the MSCI Peru index produced a return of over 156% in the three years to 29 February 2012. That was against a volatility score of 29.35.

Compare that with the broader MSCI Latin America index, which returned 125.58% against volatility of 21.24.

Western Europe fared worse. For volatility of 22.02, the MSCI Germany index returned 78.61% – about half the return from Peru. MSCI France was slightly less volatile, scoring 19.32. But its return was also poorer over the period at 49.78%.

Data providers could not identify any Europe market-domiciled country specific fund investing in Peru, although there are plenty of Latin America open and closed ended funds available in various currency denominations.

“Peru is not missed as an investment destination due to its relative size to Mexico and Brazil. It is a market which is actively followed. We think it’s more a function of valuations and liquidity. Peru and the Andean region in general have strong economic growth offer attractive investment opportunities, but fewer investable stocks. The equity market is young and lacks the liquidity that we find in other markets, this restricts the number of stocks that we can actually invest in,” Landers said.

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