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
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?
Rock: 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.
Hanson: 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.