Let’s face it: there are not many good things that investors associate Colombia with. Most of the time when Colombia is mentioned in the news it’s something about the never-ending drug war or corruption. But lately, Colombia was included in the new CIVETS club (the up-and-coming mini BRICs). Now that’s a designation that has sparked investors’ interest.
The CIVETS — Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa — have real potential. Previously, I have talked about Indonesia and South Africa and peripherally about Egypt. But Colombia has made a lot of progress in the past 10 years and it looks like things are finally beginning to turn.
In fact, the country has seen accelerating growth between 2002 and 2007, like most South American commodity-oriented economies. Outgoing two-term president Uribe made a number of pro-market economic policies as well as improvements in domestic security. Foreign direct investment reached a record $10 billion in 2008. Like most South American economies, Colombia slowed down significantly in 2008 and 2009 due to the decline in commodity prices, but the economy is re-accelerating with the rebound in global demand for natural resources. Another South American market, Chile, is hitting new all-time highs and Colombian stocks are following closely behind.
The Venezuela Mess
Besides these beneficial reforms, the government is also encouraging exporters to diversify their customer base beyond the United States and Venezuela — traditionally Colombia’s largest trading partners. This is because relations with Venezuela are strained, and relying only on a couple of trading partners is always risky.
On the subject of Venezuela, it is my personal opinion that Chavez is leading the prosperous country down the road of economic ruin. Furthermore, his business with helping out FARC in Colombia is not kosher. FARC used to be a pro-communist organization, but now has largely turned into a for-profit drug cartel. After the outgoing Uribe administration raised the issue again, Chavez broke diplomatic ties with Colombia, and claimed the United States and Colombia are creating excuses to invade Venezuela. He also threatened to cut off Venezuela’s oil exports to the United States, which account for most of his country’s foreign income. (He has done that before, but much of his exports are heavy sour crude that can most easily be processed in the U.S., so he is out of luck.)
Still, bilateral trade has fallen 70% and the Colombians are looking for new markets. Since the current situation isn’t good for Chavez or for Colombia — and this very same theater has been seen before — common sense should prevail.
Investment Opportunities
We have the introduction of a new Global X/InterBolsa FTSE Colombia 20 ETF (NYSE: GXG), which has nearly tripled since March 2009, outperforming Chile as represented by the iShares MSCI Chile Investable Market Index (NYSE: ECH).
This is a good place to make comment about this very advance. It is highly unlikely that many emerging market stocks will come back to those levels.
People see these huge advances, get scared and miss out on the coming moves. Since emerging markets grow faster economically, even if we get to such depressed valuations again — highly unlikely — stocks will still be trading at much higher levels. Japan is seeing multi-decade lows as the economy is shrinking, the banking system is not in good shape and the population is declining. None of these conditions are present in our favorite emerging markets — this is why they are our favorites.
Now, as the ETFs sector exposure, GXG is geared towards Banks (24.86%), Oil & Gas (28.19%), Financial Services (16.59%) and Industrials (10.05%). The main holdings are Ecopetrol (19.69%), Bancolomia (19.25%), Pacific Rubiales Energy Corp. (7.1%) and others.
It happens that Ecopetrol (NYSE: EC) is also listed on the NYSE as an ADR. The company plans to invest $80 billion through 2020 to more than double daily output to 1.3 million barrels of crude. The company is expanding its search for oil in Colombia, Brazil, the U.S. Gulf of Mexico and Peru. In fact, Colombia will use its armed forces to help search for new reserves of oil. The country is South America’s third-largest oil producer after Venezuela and Brazil. The company is huge with a market cap of $68 billion, but very little debt, which causes it to trade at a premium multiple of 20 times earnings with a nice dividend of 3.6%. The company’s reserves are primarily concentrated in Latin America.
The other big ETF component also trades in the U.S. — Bancolombia (NYSE: CIB). The bank is the dominant financial institution in the country and as such, it will benefit disproportionately from the reforming of the Colombian economy and accelerating economic growth. The stock trades at 13 times earnings and yields 2.2% on a payout of only 25%.
As of this writing, Ivan Marchtev did not own a position in any of the stocks named here.
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