My recent return to Peru after thirty years living in the US and Europe, ten of which was spent working on Wall Street, has left me feeling like something of an expatriate in my home country. As expatriates, we sometimes throw ourselves into activities that help maintain our self-identity and remind us of home. Some may find refuge in eating food from our own countries, keeping up with the latest music from home or by following our hometown sports team.
For me, sifting through companies and stocks on the Lima Stock Exchange reminds me of where I last lived, New York City. So you may ask, "How can reading Banco de Credito's annual shareholder report and seeing their mascot, the Magic Cuy, remind you of New York?" Sure, most of the companies with stocks on the Lima Stock Exchange (BVL, for its Spanish name Bolsa de Valores de Lima) are in Peru and cater to Peruvian customers.
For the most part, however, the types of companies you find, the financial terminology used and the tools we have to value them are the same as with any stock market around the world. And to me, that is comforting. I am originally from Peru, but recently moved back and formed an investment advisory firm.
I would like to present some of my findings, a basic overview of the BVL if you will, and focus on comparing it to other markets around the world.
The first thing you notice when looking at the Peruvian stock market is that it's not very big, and it really does not trade frequently, at least when you compare it to exchanges in developed countries. Even when compared to other Latin American countries, Peru's market is still relatively shallow in terms of amounts traded.
Here are some basic statistics: The total value of all the companies that trade on the BVL (the market capitalization) at the end of 2011 was S/. 328 billion, or $121.7 billion. Stocks also trade much more often on the New York Stock Exchange than they do in Lima. During the average day in 2010, about 1% of US GDP was traded in the value of stocks on the NYSE. In 2007, when the Lima Stock Exchange set a record for trading volume, an average day saw .009% of Peruvian GDP trade.
How does participation in the Peruvian market compare to other Latin American countries? If we look at Peruvian mutual fund assets at the end of 2011, they are only 4% of Peruvian GDP. Chile was at 14% and Brazil 45% of GDP. For comparison, the US has averaged in the low 40s and European nations have been stably in the 20s as a percent of their GDP.
Slicing the pie even further, 85% of the money invested in Peruvian mutual funds is in bond only funds, about 5% is in stock only funds, and the rest is in mixed/stock bond funds. The world averages a 50/50 split between stock and bonds.
If the Peruvian public is individually not investing in the BVL, at least not in the same percentages as in other nations, then who are the investors in the Peruvian stock market? At the end of last year, stock holdings by the 4 Pension Administrators (AFPs) were about 16% of the BVL. The other large holders of Peruvian stocks are foreign investors in the form of mutual funds, indices and hedge funds. These make up 35 to 45% of the total holdings in the BVL, and my guess would be that they account for a much higher percentage of the daily trading. Of the foreigners holding Peruvian stocks, 68% were domiciled in the US.
What kinds of companies are found on the Peruvian exchange? As most people in Peru can imagine, mining makes up a large share of the companies that offer shares on the market. Mining is one of the dominant business sectors in Peru and mining operations have large upfront capital costs which can be well funded by investors on stock exchanges. At the end of 2011, the mining sector was over 51% of the Peruvian stock market and that number has been fairly stable the past few years.
Since 2009, Industrials (cement producers, food companies, etc) and Miscellaneous (shares of the stock market itself, conglomerates and holding companies) have been gaining the most market share on the BVL. Together, they now make up over 20% of the market. The other large sector is Banks, which are 13% of the market.
So how do we use this information? Will participation in the stock market, both by Peruvian investors and Peruvian companies, ever match Chile's, Brazil's or even the United States'? And how long will that take to happen?
Honestly, my opinion here would be worth just as much as any good Peruvian card reader's. However, my main takeaway would be following: Sometimes the best investment opportunities are found in places where the least amount of people are searching. Adding capital to the stock market, either foreign or domestic, would encourage more companies to sell their shares on the stock market, which in turn makes the market more attractive to investors, which in turn raises prices. And the stock investor's favorite market will always the one that has been going up.
In my next article, I will give my opinion on how to best take advantage of the opportunities the BVL has, but here are a few names to start researching. The best indexing tool available for the Peruvian market is the iShares MSCI All Peru Capped Index (EPU) which is an exchange traded fund that tracks the 28 largest and most liquid stocks of companies with substantial operations in Peru. There are also some companies that list on non-Peruvian exchanges such as miners Southern Copper Corp (SCCO), Compania de Minas Buenaventura (BVN) and Hochschild Plc (HOC). The largest bank in Peru, Banco de Credito de Peru, also trades on the New York Stock Exchange as Credicorp Ltd (BAP).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.