El Conquistqdor Francisco de Orellana

El Conquistqdor Francisco de Orellana
The Conquistador who put the Amazaon baisn "on the map"....Francisco Orellana

Saturday, October 13, 2012

South America Holds the World’s Best Kept Secret

Last time I came here, back in 2006, this place was a dump. If someone asked me to describe it, the words “ugly” and “dirty” would certainly come to mind.

Although I knew it was a third world country, I was still surprised by the level of poverty in some parts of Lima, the capital of Peru.

I was not expecting to see huge piles of trash accumulating on the streets. In other parts of the country, I couldn’t walk five minutes without being stopped by a beggar.

After six years, I’m back in Lima visiting my wife’s family. Although I haven’t seen piles of trash like the last time, the streets remain pretty dirty. My impression is that not much has changed … the signs of poverty are everywhere.

But the truth is, Peru is going through a deep transformation. The kind of change Brazil went through in the 1990s, before the economic boom. And these changes present a lot of opportunities for us as investors … especially if we get in early.

The Fastest Growing Country in Latin America is NOT Brazil

When I was in grad school in the U.S., one of my classmates asked me if Peru was in the Middle East. I thought he was joking, but he wasn’t. That’s when I realized many Americans know very little – or nothing – about Peru.

When investors think of Latin America, for example, the first (and maybe the only) country that comes to mind is Brazil, the South American giant. But when it comes to growth, Peru puts Brazil to shame.

Peru was the fastest growing economy in the region over the past decade. The chart below shows the gross domestic product (GDP) growth of the two countries. While both suffered during the 2008 crisis, it’s clear Peru has been growing much faster than Brazil.

More importantly, the Brazilian economy has cooled off over the past couple of years. Peru’s economic growth, on the other hand, has stabilized at a much higher level. The country is expected to grow 6% next year.

Growing Middle Class Means Huge Investment Returns

This economic boom has resulted in a rapidly expanding middle class. That’s what makes Peru a great investment opportunity.

If you don’t believe me, you just have to look at the performance of the Peruvian stock market over the past decade. While Brazilian stocks have rallied 572% in the last 10 years, Peruvian stocks have rallied 1,757%.

Despite this massive rally, Peru remains in the early stages of economic growth.

One way you can measure the potential of emerging consumers is by looking at the country's GDP per capita. That’s the gross domestic product divided by the number of people in the country.

The lower the GDP per capita, the lower the standard of living … and the lower the standard of living, the higher the growth potential.

Peru has lots of potential because its GDP per capita is equivalent to just 47% of the world average. As the middle class emerges, Peru is likely to experience a boom in consumer sectors.

Despite a recent slump in metals exports (resulting from a slowdown in Chinese imports), Peru continues to grow at a very healthy pace. Surging consumer demand is boosting the retail, service and banking industries. That’s what’s fueling the fastest economic growth in South America.
The Easiest Way to Invest in Peru

You can buy a diversified basket of Peruvian stocks through the iShares MSCI All Peru Capped Index (EPU).

This ETF has heavy exposure to mining stocks. Despite the growing middle class, mining remains the heart of the Peruvian economy.

The country is the world's sixth-largest producer of gold, third-largest producer of zinc, second-largest of copper and the largest producer of silver.

So, EPU is also a way to play the boom in precious metals. One of the largest holdings of this ETF, for example, is Compania de Minas Buenaventura. It’s the second-largest public company in Peru and one of the main gold and silver producers in the world.

But this ETF will also give you exposure to the middle class. The largest holding of the ETF is Credicorp Ltd., the largest financial services holding company in Peru.

A huge part of the population in Peru still doesn’t hold their money in banks. So Credicorp is well positioned to capitalize on the emergence of the Peruvian middle class as they start to require more modern financial services to deal with their new wealth.

Although investing in Peru is a growth idea, you’ll also get income: EPU has a current dividend yield of 2.4%, enough to beat the yields of Treasury bonds and the S&P 500 index.

Peru may just be the world’s best kept secret. If you’re a long-term investor, EPU deserves a place in your portfolio. It’s a great way to invest in this promising country.

And, a few years from now, when investors start talking about Peru on CNBC, you will be glad you were well ahead of the herd.


Evaldo Albuquerque
Senior Analyst

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