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Emerging market investing has been extremely rocky in 2011, as fears over inflation and political issues have plagued nations around the world. Broad-based funds such as VWO or EEM are still down for the year while ETFs tracking important emerging nations such as China and India are seeing even stiffer losses in the period. One especially tumultuous market has been in Peru, the mountainous South American nation that has seen the value of its exports experience extreme levels of volatility and a tumultuous political landscape throw markets into turmoil.

Earlier this year, Ollanta Humala beat Keiko Fujimori in a close race for the Peruvian presidency, winning by about 3% in a run-off election. Markets initially sold-off heavily on the news of Humala’s election over what was seen by many as the more pro-business candidate in Fujimori. It didn’t help that many thought Humala had close ties to left-wing leaders on the continent including Evo Morales in Bolivia as well as Hugo Chavez and his economic basket case in Venezuela, scaring many investors and sending even more running for other markets in the region. As a result, prices on the Peruvian stock exchange plummeted directly after his election - falling by close to 10% in a single day - and sliding further in the weeks immediately following Humala’s win.

However, despite these concerns over his philosophical leanings, he has managed to soothe investor concerns in recent days thanks to his promise to keep Julio Velarde as the country’s Central Bank President. In response to this, the Lima General Index rose by close to 4.5% in mid-day trading, helping to squelch fears over a swing to the left in terms of economic policies. That is because Velarde has, by many accounts, done a pretty solid job in helping to manage the Peruvian economy since he took over in 2006. Since he began his term, forex reserves tripled to close to $47 billion, or roughly one-third as much as the total national GDP, giving the country plenty of policy options to navigate through economic challenges. Obviously, high prices for exports didn’t hurt either, but it should also be noted that the country has one of the lowest inflation rates in the region and that Velarde hasn’t been afraid to raise rates in order to keep a lid on price increases, something that should be welcomed by the nation’s growing middle class. “Velarde’s appointment is a very good signal,” said Sebastian Blondet, a trader at Celfin Capital SAB. “The markets were waiting for a sign that Humala will maintain macroeconomic policies and a stable currency.”

Thanks to this turmoil and the more recent sigh of relief by the markets, the main ETF tracking the nation, the MSCI All Peru Capped Index Fund (NYSEARCA:EPU) has been on quite the wild ride as of late. The fund was up 3% at the end of Monday’s trading and it has gained close to 8% over the past four weeks. However, from a longer term perspective, EPU has seen significant weakness as the fund is down close to 17% since the beginning of the year and close to 10% over the last six months. The losses are especially pronounced in early June when Humala was first elected; on that day, prices for EPU slumped from the $43.50 level down to the $37.5 mark, representing one of the worst days in recent memory for the popular ETF.

These events should serve as a huge warning to emerging market investors and those in the ETF space. Political changes can have an enormous impact on the outlook for a particular country and these developments need to be watched closely in order to get a better idea of sentiment in a nation. Investors who were caught off guard by Humala’s election and his subsequent move to the center likely panicked and may have sold their positions in EPU in what turned out to be a bottom for the fund, at least in the short-term. Meanwhile, those who bought in after the market’s crash on Humala’s electoral victory are sitting on very impressive gains in what has been a very rough market overall, further underscoring the importance of doing your homework on a nation before taking the ultimate leap of faith and buying an individual country’s ETF.

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Disclosure: Long VWO.

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Source: Peru ETF Continues to Bounce Back After Election Sell-Off