In the final three quarters of 2009, emerging markets took the lead in the global recovery effort, delivering impressive growth rates as the world’s developed economies continued to struggle. China and India received the bulk of attention (and cash) from international investors, but South American equity markets had a banner year as well, led by Brazil. The signature moment for South America’s largest economy came in early October when Rio was awarded the 2016 summer Olympics, but Brazilian equities surged throughout the year, giving other Latin American economies a major boost in the process.
But since the calendars flipped to 2010 it’s been a completely different story. As a wave of risk aversion swept across financial markets, many Latin American ETFs–and Brazil funds in particular–find themselves deep in the red as January draws to a close. The iShares MSCI Brazil Index Fund (EWZ) is down 11.1%, while the Brazilian small cap ETF from Van Eck (BRF) has lost more than 14% already in 2010.
Brazil’s downturn is yet to spread to its neighbors, as other South American economies have bucked bearish global trends to land on the exclusive list of markets that are in the black on the year. Colombia in particular has managed to sustain last year’s rally, with the benchmark IGBC Index recently hitting its all time high. Colombia is classified as a frontier market, meaning that it lacks the liquidity, investor protections, and financial market efficiencies of even emerging economies. After battling double digit inflation and 20% unemployment in the early part of the last decade, Colombia has successfully implemented a series of economic reforms, resulting in impressive growth rates and shrinking national debt.
A 14% year-over-year increase in construction spending and public works projects in 2009 helped Colombia avoid a sharp downturn, but caused the country’s budget deficit to rise again. Colombia now expects to have a consolidated budget deficit of 3.7% of GDP in 2010, up from 2.7% in 2009. By the end of 2010 the government expects net debt to equal about 38% of GDP, less than half the level in 2006.
Continued progress toward emerging market status have helped to boost Colombian equities in recent years. The integration of the Peruvian, Chilean, and Colombian stock markets is now underway and should be completed by the end of 2011. Colombia has also benefited from a big run-up in commodity prices. The country has the largest coal reserves in Latin America, and is behind just Brazil in hydroelectric potential. Several regions of Colombia are rich in nickel, gold, silver, and platinum.
Colombia’s economic challenges are similar in many ways to those facing the U.S.: high unemployment and weak retail sales remain as obstacles to a continued rally in 2010.
Inside The Colombia ETF
Colombia is one of the largest economies in South America (between Venezuela and Chile by nominal GDP), but neither the iShares S&P Latin America 40 Index Fund (ILF) or SPDR S&P Emerging Latin America ETF (GML) make any allocation to this country. The Global X/InterBolsa FTSE Colombia 20 ETF (GXG) seeks to replicate the performance of a benchmark consisting of the largest and most liquid Colombian stocks.
GXG is based on a market capitalization-weighted index, making the fund a bit top-heavy: state-controlled oil firm Ecopetrol SA makes up more than 20% of GXG while financial behemoth Bancolombia SA makes up another 18%. With gross proven oil reserves of 1.88 billion barrels, Ecopetrol is one of the continent’s largest oil producers. By comparison, Brazilian energy giant Petrobras has proven reserves of crude oil and natural gas of just under 15 billion barrels.
Aside from Ecopetrol, GXG maintains minimal exposure to the energy sector, giving significant weightings to the banking, financial services and utilities industries. GXG’s name is a bit misleading – both the fund and its underlying index actually consist of 21 stocks. GXG charges an expense ratio of 0.86%. (Click to enlarge)
For more reading in the Colombia ETF, see this interview with Global X CEO Bruno del Ama.
Disclosure: No positions at time of writing.