Still the Best Little Investment Opportunity I Know?

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Back in June 2009, I called Peru "the best little investment opportunity I know." The reason was that the commodity-rich country had adopted fiscal discipline under President Alan Garcia, was signing free-trade agreements with its neighbors, and stood to benefit from rising trade between Latin America and China thanks to its Pacific ports. 

Since then, the iShares Peru Index (NYSE: EPU  ) is up 66%, while Credicorp (NYSE: BAP  ) , the country's leading bank and a former Motley Fool Global Gains recommendation, is up more than 50%. Thanks to rising metals prices, the country's miners are also up big for investors: Compania de Minas Buenaventura (NYSE: BVN  ) has returned almost 40%.

Until Monday, however, the returns investors could have earned in Peru were much higher. That's because the election of leftist Ollanta Humala as the new president in Peru caused some investors to worry that Peru was about to become a lot less business-friendly.

Does Humala's election change the investment case in Peru, or is this all much ado about nothing? I decided to ask my friend and Inca Kola News blogger Otto Rock (a pseudonym) -- an investor focused on the mining sector living in Peru.
Tim Hanson: The Peruvian market was off sharply earlier this week on fears that President-elect Ollanta Humala will govern more like Venezuela's Hugo Chavez than Brazil's Luiz Inacio Lula da Silva. At this point Humala is saying he will more resemble the latter. What course does Humala's government ultimately chart?

Otto Rock: Starting with the easy ones, I see! There are a couple of parts to this question, so let's split it down a little. The market was off Monday, the day after the elections and when Humala's victory was virtually certain (it's now official), because the upper-middle-class Lima socioeconomic group decided that the world was ending and all tried to bail out of trading positions at one. The Lima stock market (Bolsa de Valores de Lima) is a small bourse and its relative illiquidity simply couldn't cope with the influx of sell orders that came from the posher barrios of Lima -- the same ones that voted 88% for Keiko and 12% for Humala. However, it's key to note that the big drivers of the Peru market, the pension funds (known as AFPs), didn't participate in Monday's sell-off. So when Tuesday came around, there were enough smarter market participants to realize that the BVL had sold off on what was nothing more or less than a small and rather silly group of people panicking. So the 12% loss on Monday was offset by a 7% gain Tuesday.

Humala has been saying things to calm the business and financial spheres ever since he won the first round of the presidential vote in April. His move to the political center has been both obvious and necessary, as he had to garner enough votes from the undecideds in Peru. 

As for the course he'll take, it's likely to be something you could roughly pigeonhole as center-left. The most likely model is one that has typical left-wing policies in place for social and wholly internal issues, such as health-care plans, the setting up of his PEN250 (U$90) per-month state pension for all Peruvians over 65 years of age (no matter whether they've previously contributed or not), improvements in schooling, free meals for schoolchildren, general infrastructure, etc. Meanwhile, I see macroeconomic policies staying largely the way they've been in Peru for the last eight years, with a tightly controlled deficit, an independent Central Bank and an economy minister that will leave Peru on the same autopilot it's been through the Garcia government.

Hanson: So did we miss our chance to take advantage of a temporary panic?

Rock: I'm not great at exact timing, but did anticipate the Monday sell-off in last weekend's subscriber publication and also wrote that the next two or three days would be a good place to enter. As it turns out, Tuesday looks like it may have been the bottom. That said, we're still more than 10% off the highs registered just before the election, and there's another 20% to go before the year's high is tackled. There's plenty of reason to buy into this market if you think, as I do, that the Humala political risk has been overstated by foreign observers.

Hanson: Is there anything you're watching relative to miners that might change how you think about valuing projects in Peru. Obviously, gold is gold and copper is copper, but are there costs to greater regulation that investors should be thinking about?

Bureaucracy has always been notorious slow in the country so if permitting on projects becomes even stodgier, it's going to be hard to notice! In my opinion the investor should stick to backing projects in established mining areas of Peru, because, with some exceptions, the greatest environmental push-back tends to come from local communities that aren't in the traditional geographical locations for mining in Peru. It is a miner-friendly country and will stay that way under Humala, however it's not miner-friendly everywhere and a Humala government is likely to give greater respect to those places, for example in the far north of the country, that are dead set against miners moving in.

Finally, what might falling metals prices mean for Humala's administration?

Rock: If metals prices fell, the Humala government would no doubt feel the pinch, but the same could have been said for the last two administrations (Toledo and Garcia). Much of the basis for growth in Peru is based on its export model economy and metals are 62% of all exports by dollar value. Peru's had a good decade because copper and gold have had good decades, but what we need now from Peru is a move to a second stage of growth, the same type we saw in Lula 2, that sees the internal economy taking over and providing the new growth motor.

Tim Hanson owns no shares mentioned above. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (33)

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  • Report this Comment On June 09, 2011, at 5:57 PM, xetn wrote:

    One of my favorite mining stocks had an application for a silver mine placed on indefinite hold. I received an email from the company the same day and promptly sold.

    Peru has been one of my favorite investment venues but no longer. (At least until I see evidence as to their true business direction.

  • Report this Comment On June 10, 2011, at 2:58 AM, matthewneuzil wrote:

    I just got back from vacation in peru about three weeks ago. clearly you havent heard about the strikes in Islay of southern peru where they are "dead set" against a mine? They have been on strike since at least november 2010. google "strikes in Islay Peru" and check out the first four listings.

    heres some other BS strike people decided to have although its related to their textile industry.

    I actually had to put up with this BS as I was travelling to lima by bus from arequipa. I got stuck on the pan am at 6am and didnt get out of that stupid ass town until 6 at night. my 15 hour bus ride turned into 29 hours. We baked in the desert sun for 14 hours. The residents then took advantage of offering some nasty slop for up to 7 dollars which normally sold on streets for a dollar. litres of soda normally sold for a dollar were being emptied into tiny plastic bags for about 2 $ a cup. this country is pretty backwards and you write about it being rather good to invest in.

    Most the population is uneducated and their basis for voting this president Humala was that he wont kill anyone. This because the father of the other candidate had "killed" people. he personally hadnt but his army did. But they also got rid of the worst humans rights offenders the country if not most of south america has even seen. dont believe? read up on sendero luminoso. Want to see what they did? go to the larco museum in San Borja district of lima they have almost a whole floor of gallery to this era of terrorism by sendero lumisoso.

    the people think backwards, the country is backwards. They vote someone president with no government experience. The man knows how to use army machine guns. the other opponent at least studied in university and had been involved in social programs helping out peru already. much more prepared than this jackass elect.

  • Report this Comment On June 10, 2011, at 9:40 AM, dmarkiv wrote:

    I have more than enough stocks to choose from with out China, South America, and (for the most part part) Europe. dSo I just don't invest there.

  • Report this Comment On June 22, 2011, at 10:33 AM, FutureMonkey wrote:

    Will be interesting to see if Peru can transition from a commodity export model to a mature economy backed by their natural resources. Long way to go, but an interesting opportunity to engage at an early stage. I'd anticipate a rollercoaster ride with high risk of substantial and sustained loss, but for patient investors with a long time horizon could be a nice niche in their portfolio. It would take nerves of steel to invest heavily in Peru at this stage of development.

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