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Latin America can be a mad place to invest, but one country can bring some sanity – and great returns – to investors.
Latin America is a tough continent to invest in. It has massive natural resources of all kinds and a youthful population of relatively cheap labor. Unfortunately, nearly all of its countries are poorly run, so foreign companies suffer discrimination and as a foreign investor you can’t be sure of being treated fairly either.
However there’s one country with among the best endowments of natural resources and skilled cheap labor, a newish free trade agreement with the U.S. and a newly reelected government that plays fair and is encouraging foreign investment. Further, there are some good ways to put your money to work there.
Some Latin American countries would be a mad place to invest in. Argentina, Venezuela, Bolivia and Ecuador are all run by outlaw socialists, whose activities range from the merely amusing – Bolivia makes its clocks run backwards – to the serious – Argentina has just defaulted on its international debt and Venezuela’s human rights abuses are getting ever more worrying.
Even Brazil, the darling of investors captivated by the BRICS acronym, is suffering sluggish growth and high inflation, with all three major candidates for October’s upcoming election claiming to be Socialists of one kind or another. Mexico, Peru and Chile all offer possibilities, but it’s the fourth member in those countries’ new Pacific Alliance that looks the most attractive – Colombia.
How to Invest in Colombia
Colombia is the opposite of Brazil politically – all the five leading parties in March’s Congressional election were more or less free-market oriented and President Juan Manuel Santos, reelected in June, has pursued an open economy policy, with state spending of around 30% compared to Brazil’s 40% (his opponent was if anything more economically conservative – they differed on policy towards the FARC guerilla movement.)
Sensible policy has produced solid results – the Economist’s team of forecasters estimates a 5% growth rate for Colombia in 2014 and 4.4% in 2015, the highest growth rate of the major Latin American economies. The budget deficit is only around 1.5% of GDP and inflation is low.
Colombia is likely to get a lot of foreign investment in the next few years because if its resources, and because a 50-year guerilla war before 2006 has left it very short of infrastructure. There’s little sign of overheating in the economy and the central bank is conservative, with short-term interest rates at 4%, nicely above the 2.9% expected inflation rate.
Finally, Colombia signed a free trade agreement with the United States that came into effect in 2012. With the next election not until 2018, the outlook appears very good.
There aren’t a huge number of Colombian companies that you can buy easily in the U.S., and those you can buy are concentrated in only a few sectors, so at least part of your Colombia exposure should be in a fund or ETF. The best of those I’ve found is the Global MSCI Colombia ETF (NYSE: GXG), which tracks the MSCI All Colombia Capped Index. GXG is a $124 million ETF with a P/E ratio of a reasonable 14 times (that’s the average P/E of its holdings) and an expense ratio of 0.75%, very reasonable given the exoticness of the market it invests in. Last year it paid a dividend of 74.5 cents, giving it a yield of 3.7%.
By far Colombia’s largest company is Ecopetrol (NYSE: EC), the national oil company, with a market cap of $60 billion. Ecopetrol has doubled output in the last decade, taking market share from the badly run Venezuelan oil company and using the calming of guerilla activity to explore in regions previously inaccessible. Ecopetrol currently has a P/E of 10, with earnings expected by analysts to increase some 10% in each of the next three years as new fields come on stream. It also yields 6.2% (very nice in current markets) paying a small interim dividend and a larger final each year, on the European pattern.
The country’s largest bank, Bancolombia SA (NYSE:CIB) has assets of $67 billion and 1,090 branches throughout Colombia. It offers a full range of banking, investment banking, investment management and insurance services to retail, institutional and corporate customers. Its return on equity last year was a satisfactory 12% and its credit rating was recently raised by Moody’s to Baa2. Its earnings are forecast by analysts to jump by some 20% this year and a further 10% next year, and it’s trading on 17 times historic earnings with a dividend yield of 2.8%. With its broad spread of business and operations, Bancolombia is an excellent way to take advantage of Colombia’s solid, widely based growth.
Finally Pacific Rubiales Energy Corporation (OTC: PEGFF) is technically not Colombian; it’s headquartered in Canada. Its oil and gas production business isn’t confined to Colombia either; it owns energy blocks in Peru, Guatemala, Brazil, Papua New Guinea, Guyana and Belize, although 74 of its 95 blocks are in Colombia. PEGFF pays quarterly dividends of 16.5 cents, for a yield of 3.4%, and is trading on a P/E ratio of 15, although analysts expect a 30% profit increase in 2014 – second-quarter earnings were triple the previous year.
Colombia offers relatively good governance, excellent growth and exposure to a variety of energy, agricultural and natural resources. If you are looking for international exposure in your portfolio, its best companies are worth a serious look.
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