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Investors Should Sleep On Peru

By Jonathan Jones and Tom Lydon After several years of disappointing performances, Latin American equities are rebounding this year. While Brazil, the region’s largest economy, commands most of the attention, investors should sleep on Peru and the iShares MSCI All Peru Capped ETF (NYSEArca: EPU ) . Buoyed by higher commodities prices, EPU, the lone exchange-traded fund devoted to Peruvian stocks, is up 22% year to date, according to industry analyst ETF Trends . EPU is reflective of Peru’s status as a major miner of gold, silver and copper. The ETF devotes 46.4% of its weight to the materials sector and another 30.1% to financial services stocks. No other sector commands more than 8.8% of the ETF’s weight. Economic data is supportive of a bullish outlook on EPU and Peruvian stocks. “The latest data showed mining output slowed to 7.8% year over year, from a record high of 22.4% year over year in December, and construction, manufacturing and retail contracted by 2.7%, 3.9% and 2.6% year over year, respectively,” reports Dimitra DeFotis for Barron’s , citing Capital Economics data. EPU has come a long way from struggling amid lower gold and silver prices (Peru is a major producer of both metals) and wondering about Peru’s market classification. Index provider MSCI had previously warned that Peru was in danger of losing its emerging markets status and being demoted to the frontier markets designation. However, earlier this month, MSCI confirmed it is keeping Peru in the emerging markets group. The index provider did say that risks remain to Peru’s retention of emerging markets status. “MSCI warned earlier in mid-August that Peru could be downgraded to frontier market status as only three securities from the country had met the size and liquidity requirements for emerging market status,” according to Emerging Equity. “We still expect GDP growth to accelerate to around 3.7% in 2016, from 3.2% in 2015… it is too soon to worry about a renewed slowdown in growth in the first quarter of 2016. … Mining output is likely to rise further in 2016 as a number of copper mines expand production. What’s more, government spending is set to remain supportive as planned infrastructure projects continue to be implemented. We doubt the upcoming presidential election in April will change the outlook much, either, as all the leading candidates appear to be committed to continuing with the current government’s fairly orthodox economic policy,” said Capital Economics in a note posted by Barron’s. iShares MSCI All Peru Capped ETF Click to enlarge Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

The Global X MSCI Colombia ETF: Rebound From 52-Week Lows

Summary Colombia is projected to have the highest Annual GDP Growth in Latin America in the next 12 months. The Global X MSCI Colombia ETF is trading below its book value and is also trading at its 52 week low. The fund has witnessed a sharp decline in its price since 2014, yet financial performance of the fund’s top 10 holdings during this year was favorable. General exposure to this ETF is a wise endeavor, while specifically investing in the banking industry may be wiser, due to its lower valuation and superior financial performance during 2014. Given the current low oil price environment, Colombia is certainly a country worth investigating for a potential rebound, as the Global X MSCI Colombia ETF (NYSEARCA: GXG ) has witnessed a sharp decline in price since September 2014; the fund reached a high of 20.78 around this time and is now trading at 8.96. Despite the risks associated with its economy being dependent on oil exports, and the fact that it has had the highest political risk among countries in Latin America, there are still ample opportunities to be found after investigating the valuation and current price of this ETF; the fund is trading below its book value and is also trading at its 52 week low. Moreover, Colombia has been among one of the fastest growing countries in Latin America, and has the highest economic growth projections for the next twelve months. GXG data by YCharts Global X MSCI Colombia ETF The fund has been consistently declining since 2014, and is extremely far from its 52 week high of 20.78. The recent decline in the price of oil has attributed to a drop in the fund’s price, and has consequently created attractive valuation : P/E ratio: 15.91 P/B ratio: 0.92 P/S ratio: 1.01 The fund’s holdings are extremely diverse, and invest into the following industries: Financial Services: 36.74% Basic Materials: 16.85% Utilities: 16.46% Industrials: 6.66% Economic Outlook Colombia has a favorable economic outlook for the next twelve months, and will lead Latin America in Annual GDP Growth. The following projections have been made for the 2nd quarter of 2016 Annual GDP Growth will increase from 2.8% to 3.2%. Inflation will remain near 4.4%. Exports will decrease by 3.1%. FDI will increase by 22.9%. Crude oil production will decrease by 0.7%. Retail sales will increase by 4.42%. Consumer spending will increase by 3.2%. Consumer credit will increase by 10.4%. Overall economic projections for the next twelve months appear to be very favorable for the country, with slight Annual GDP growth projected for the next twelve months. An increased trend of consumption and retail sales is projected for the next twelve months, which will further attribute to economic growth. Most important to note, is that the low oil price environment has not deterred FDI, as this is projected to increase by 22.9% during the next 12 months. Latin America Annual GDP Growth Comparison Recently Colombia has had the highest Annual GDP Growth, and is on track for higher economic growth during the next twelve months. While Peru and Chile have ample potential for long term recovery due to the current adverse impact of low commodity prices, a twelve month outlook provides the most favorable results for Colombia. Annual GDP Growth 2012 2013 2014 Current 2nd Quarter 2016 Projections Colombia 4 4.9 4.6 2.8 3.2 Peru 6 5.8 2.4 1.7 2.03 Argentina 0.8 2.9 0.5 1.1 0.76 Chile 5.5 4.2 1.9 2.41 2.37 Brazil 1.8 2.7 0.1 -1.6 -0.3 Source: World Bank Top 10 Holdings Overall, the financial performance of the fund’s top ten holdings has been exceptional, which makes the fund’s sharp drop in price somewhat undeserved. The fund’s holdings had a 10.6% increase in net revenue and a 10.8% increase in net income. An industry specific approach provides a mixed outlook regarding valuation and financial performance: The banking industry can be considered superior, due to its extremely attractive valuation and having exceptional growth. The utilities industry also had exceptional growth, and its valuation is relatively attractive. The consumer products industry has relatively attractive valuation, but experienced negligent growth. Increased projections for consumer spending will be a positive driver for future growth. The construction industry had substantial growth, but also has extremely high valuation. For risk seeking investors, the main holding in the oil industry has low valuation, although financial performance was not favorable in 2014. Value Based Approach Ecopetrol S.A and Bancolombia SA are two options for valued based investors to gain exposure to Colombia, as both companies have lower valuation than the ETF. Bancolombia SA’s historical P/E has been exceptionally higher in the past, with a five year P/E high of 38.61 . The banking industry holdings in the fund were among the top performing, and Bancolombia SA is a superior pick considering its net income increased by 24% while the fund’s price dropped substantially. Ecopetrol SA is a riskier pick as its net income and net revenue have been consistently declining since 2012, and sole exposure to this industry may be risky. However, valuation is the lowest of the fund’s top 10 holdings. Conclusion Now is an strategic moment for investors to gain access to Colombia’s growth, which is set to outpace other countries in Latin America during the next twelve months. The low oil price environment has created attractive valuation for the Global X MSCI Colombia ETF, which is further edified by the projected growth for Colombia. General exposure to this ETF is a wise endeavor, while specifically investing in the banking industry may be wiser, due to its lower valuation and superior financial performance during 2014. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

AZIA: A Worthwhile Investment Despite Challenges For Central Asia Ahead

Summary Although the economic outlook is not entirely favorable in Central Asia, the current valuation of the Global X Central Asia & Mongolia ETF presents a buy opportunity. While falling commodity prices have slowed economic growth in Central Asia, and will still present challenges ahead, it still has a favorable investment climate. The fund is trading extremely close to its 52-week low, is trading below its book value, and has a P/E of 11.34. Countries that are currently suffering from low commodity prices actually present excellent buy opportunities. Global X Central Asia & Mongolia ETF (NYSEARCA: AZIA ) is at a very strategic buy point, as it is trading near its 52-week low and has extremely low valuation. It invests into high-growth countries in Central Asia that have had an economic downturn due to falling commodity prices. The fund’s price drop to 9.53, far from its 52-week high of 14.45, has provided very favorable valuation . P/E Ratio: 11.34 P/B Ratio: 0.98 P/S Ratio: 1.28 A combined look at the macroeconomic outlook for Central Asia and the performance of the individual fund holdings shows that while economic growth will be slower and some companies have had setbacks in financial performance, the impact on the fund’s price has been sensationalized. Many companies were not drastically impacted by the decline of commodity prices, and have a favorable future outlook. This shock in the fund price has created opportunities for investors to invest in a fund trading below its book value, and that has room for growth amidst the economic challenges that Central Asia has ahead of it. Macroeconomic Outlook GDP growth has most recently been substantial, and is impressive to note given the fund’s sharp drop in price. While the GDP growth forecast for 2016 is less favorable overall, the growth is still impressive for Asia and a favorable climate for investment. The IMF has projected a 2% decrease in growth in Central Asia, due to lower commodity prices and the economic downturn in Russia. Inflation is another issue this region will continue to face, as inflation is projected to increase from 4.82% to 5.45% in 2016. As seen by an assessment of the fund’s holdings later in this article, commodity prices have had a mixed effect on the companies while companies with operations in Russia have witnessed a threat to financial performance. While Central Asia may not be the best environment for investment, the key opportunity presented here is within the fund, rather than the region. Moreover, the majority of the fund’s holdings are listed on US exchanges, providing investors with the opportunity to cherry pick the most favorable options, and to potentially avoid waiting long term for Central Asia’s holistic recovery. Top Exports As many of these countries rely on revenue from exports, the declining price of commodities has resulted in slowed economic growth. The fund’s performance is therefore correlated with the successful outlook for commodity exports and price recovery of commodities, with oil prices having the largest overall effect on many of these countries. Fund Holdings A closer look at the fund’s top holdings, which comprise 65.8% of the fund’s total holdings, provides a favorable outlook. Although the fund’s price sharply dropped since its high of 14.45 in 2014, financial performance of the fund’s holdings has not been poor enough to make this sharp drop in price justifiable. Dragon Oil ( OTCPK:DRAGF ) increased its net income from $512.6 million to $650.5 million in 2014. Although Highlands Bancorp ( OTCPK:HSBK ) was able to drastically increase net revenue, it still witnessed a sharp decline in net income in 2014 from $2.3 million to $0.7 million. The company has a P/E of 14. KMG Chemicals (NYSE: KMG ) increased its net income from $9.3 million to $13.8 million in 2014, and its net revenue from $263.3 million to $353.4 million. KCell JSC GDR’s net income decreased from 63,392 KZT Million to 58,271 KZT Million in 2014. Nostrum Oil and Gas’s net income fell from $220 million to $146 million. Turquoise Hill Resources (NYSE: TRQ ) has consistently been increasing its bottom line since 2010, resulting in the beginning of profitable operations in 2014. Vimpelcom ( OTC:VMPLY ) operated at a loss of $903 million in 2014, and its revenue continues to be threatened due to its operations in Russia . MIE Holdings ‘ net income fell from $45.6 million to $9.4 million in 2014. Mongolian Mining Corporation ( OTC:MOGLY ) had a substantial drop in net income and net revenue, and is being threatened by increased operations costs and the declining price of coal. Conclusion Overall, the financial performance of the fund’s holdings was exceptional, and the sharp drop in the fund’s price during this year is not entirely befitting. A buy opportunity has thus emerged, either directly into this fund, or into some of the individual holdings. Low commodity prices and economic adversity in Russia have been negative drivers for this fund, although they have not completely deterred the fund’s performance. While the fund is overall a favorable endeavor, Dragon Oil stands out the most at first glance, due to its lower valuation and growth in 2014. The level of growth projected for the future in Central Asia is still acceptable, and the valuation of this fund is certainly superior, when compared to other alternatives in Asia. While the threat of commodity prices poses an exceptional risk, the fund’s superior valuation and the buy opportunity that has thus emerged makes it a worthwhile endeavor. Central Asia is merely one of many destinations that is currently suffering from the drop in commodity prices; I have previously mentioned Peru , Chile , and Brazil as having similar opportunities. This current economic situation has created global buy opportunities, and Central Asia is surely one destination with ample potential for a rebound. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.