The Colombian Growth Story: Strong Fundamentals Stand Out

Includes: CIB, EC, FRN, GXG, OGEM
by: World Market Pulse

As allegedly reported by the media and with a common perception of being a nation of rich in drug peddling, abductions and murders, the Republic of Colombia has undergone a remarkable transformation over the past decade. Colombia has been fighting to prove that it is a safe and worthwhile investment destination and has now put itself firmly back onto the investment map. Transforming itself from the Drug capital of the world to a nation attracting strong foreign investment in recent years, Colombia's strong fundamentals stand out. Not only has Colombia been recognized as one of the best pro-business reformers globally in recent years by the World Bank, the country's $130 billion economy, a world leader in the production of coffee, petroleum, textiles, and flowers, is growing at 6.8% a year, two full points faster than the Latin American average. Colombian economy has experienced tremendous growth, benefiting from a commodity boom and sound policies that stimulated growth. The Colombian economy is arguably the largest in Latin America after Brazil, Mexico and the forever in transit economy of Argentina, with one of the largest deposits of oil and natural gas deposits in Latin America.

The lush green tropical jungle country of Colombia has one of the largest deposits of green gem emerald mostly exported to jewelry producing nations. Named after Christopher Columbus by the South American liberator Simon Bolivar, the modern day Colombia continues to be a dark spot on their investment horizon for some investors. Even though the country's notorious past acts as a speed breaker preventing foreigners from investing in this Latin American nation, the fact is that every indicator of violence in Colombia including homicides, kidnappings, and acts of terrorism have declined significantly over the past eight years.

  • Terrorist acts are down 84% from 2002.
  • Homicides have dropped 45 percent from 2002 through 2009 – the lowest homicide rate in 22 years.
  • Kidnappings have dropped significantly, down 88% from 2002, also now at the lowest rate in 22 years.
  • Today Colombia has a lower violent crime rate than many major U.S. cities.

Far from being a dangerous place to even visit, let alone considering any thoughts of investment, Colombia is slowly but surely transforming itself into a Latin American success story with its free-market approach to its economy.

  • According to Bloomberg data, Colombia is forecast to attract about $10 billion in foreign direct investment this year, up from about $7.5 billion last year.
  • Colombia's stock market has increased 14-fold since 2001 with a still modest total capitalization of $59 billion.
  • Colombia is seen as a trustworthy ally by the United States amid its deteriorating ties with Venezuela and Ecuador. The U.S. has sent $5 billion in aid to Colombia since the year 2000 making it the 4th largest financial aid recipient of the U.S.
  • In the past 10 years, Colombia has slashed its inflation rate from 18% to 5%, and since President Alvaro Uribe was elected in 2002, unemployment has dipped from 16% to 13%.
  • Not only has Columbia been the best performing stock market this year, posting a double digit gain as opposed to all major markets that are down for the year, Colombia has blown away all challengers over the last decade posting an 34.5% annualized return.
  • Colombia has abundant natural resources, including gold, silver, copper, coal, oil, gas, and more, a good deal of which remains under explored. Global gold mining companies are likely to invest as much as 4.5 billion U.S. dollars over the next ten years in Colombia attracted by rich unexplored regions and soaring prices of the commodity.

ETFS Investing in Colombia

Global X/InterBolsa FTSE Colombia 20 ETF (NYSEARCA:GXG): The FTSE Colombia 20 Index is market capitalization-weighted index of the 20 most liquid stocks in the Colombian market. The index is designed to measure broad based equity market performance in Colombia.

GXG Top Ten Holdings

1. Ecopetrol S.A. ADR (EC): 20.32%
2. BanColombia SA ADR (CIB): 19.93%
3. Pacific Rubiales Energy Corp. (NYSE:PRE): 8.74%
4. Compania Colombiana De Inversiones SA, Bogota: 5.15%
5. Gpo De Inversiones: 5.05%
6. Cementos Argos SA: 4.84%
7. Almacenes Exito Sa, Colombia: 4.81%
8. Grupo Aval Acciones Y Valores Grupo, Bogota: 4.72%
9. Grupo Nacional de Chocolates SA: 4.65%
10. Inversiones Argos: 4.58%

GXG Sector Breakdown
Financials 34.26%
Energy 29.06%
Industrial Materials 5.73%
Consumer Services 4.81%
Consumer Goods 4.65%
Utilities 4.42%
Telecom 0.96%

Expense Ratio: 0.86%

Claymore/BNY Mellon Frontier Markets ETF (NYSE:FRN): The Index tracks the performance of depositary receipts, in ADR or GDR form, that trade on the London Stock Exchange, New York Stock Exchange, NYSE Amex and Nasdaq Stock Market of companies from countries that are defined as the Frontier Market. The fund has a 12.33% holding in Colombia.

FRN Top Ten Holdings

1. Ecopetrol S.A. ADR (EC): 7.60%
2. Enersis SA ADR (ENI): 6.64%
3. National Electricity Company of Chile, Inc. ADR (NYSE:EOC): 6.54%
4. Buenaventura Mining Company Inc. ADR (NYSE:BVN): 5.74%
5. BanColombia SA ADR (CIB): 4.73%
6. Commercial International Bank (Egypt) S.A.E. GDR : 4.38%
7. Guaranty Trust Bank PLC GDR (GRTB): 3.87%
8. Sociedad Quimica Y Minera De Chile SA ADR (NYSE:SQM): 3.80%
9. JSC KazMunaiGas Exploration Production GDR (KMGB): 3.72%
10. Santander-Chile Bank ADR (NYSE:SAN): 3.67%

FRN Sector Breakdown

Financials 39.87%
Utilities 14.01%
Energy 13.67%
Industrial Materials 13.31%
Telecom 10.53%
Consumer Goods 5.23%
Business Services 3.40%

Expense Ratio: 0.65%

EG Shares Dow Jones Emerging Markets Energy Titans Index Fund (EEO):
This index is designed to represent 30 of the largest emerging-market companies in the Oil & Gas Industry as defined by the Industry Classification Benchmark (NYSE:ICB). The Fund has 4.78% holdings in Colombia.

EEO Top Ten Holdings

1. Reliance Industries Ltd.: 10.33%
2. Surgutneftegaz OAO (OTCPK:SGTZY): 8.39%
3. CNOOC, Ltd. (NYSE:CEO): 7.70%
4. OAO Gazprom ADS (OTCPK:OGZPY): 6.73%
5. PetroChina Company, Ltd (NYSE:PTR). : 5.94%
6. Petroleo Brasileiro S.A. (NYSE:PBR): 5.85%
7. China Petroleum & Chemical Corporation (NYSE:SNP): 5.16%
8. Ecopetrol S.A. ADR (EC): 4.78%
9. Lukoil Company ADR (OTCPK:LUKOY): 4.70%
10. Ptt Public Company Limited (PTT): 4.41%

EEO Sector Breakdown

Energy 87.69%
Industrial Materials 10.33%
Hardware 1.98%

Expense Ratio: 0.85%

Colombian Companies Listed On NYSE

Bancolombia (NYSE: CIB): Bancolombia S.A. (Bancolombia or the Bank) is a full-service financial institution that provides a range of banking products and services to a diversified individual and corporate customer base throughout Colombia, as well as in other jurisdictions, such as Panama, El Salvador, Puerto Rico, the Cayman Islands, Peru, Brazil, the United States and Spain. Bacolombia's shares have witnessed a 20-fold increase in the last 5 years.

  • Mkt cap 12.42B
  • EPS 3.51
  • P/E 17.96

Ecopetrol (NYSE: EC)
: Colombia's state-controlled oil company, which sold a 10.1% stake to the public last year, has become only the second company based in Colombia to list American depositary receipts on the New York Stock Exchange. Ecopetrol Is currently producing 440,000 barrels of oil per day, and its goal is to produce 1 million barrels a day by 2015.

  • Mkt cap 68.56B
  • EPS 1.60
  • P/E 21.18

The Colombian Stock Exchange: The Colombian stock exchange or the Bolsa de Valores de Colombia, also known as Bolsa de Valores (BVC), is the principal stock exchange of Colombia. It was created on July 3, 2001 by the union of three extant stock exchanges in Colombia: Bogota Stock Exchange (Bolsa de Bogota), Medellín Stock Exchange (Bolsa de Medellin)and Cali's Western Stock Exchange (Bolsa de Occidente). The company maintains offices in Bogotá, Medellín and Cali.

As a part of its modernizing plans, the Colombian Stock Exchange, Bolsa de Valores de Colombia (BVC), is working with UK-based technology provider Rapid Addition to facilitate low-latency trading on its exchange. The move is part of a drive to allow high frequency trading in the country, which it is hoped will provide more liquidity, thus facilitating investment and trade.

Largest Companies Of Colombia Listed In Colombian Stock Exchange

  • Food: Bavaria SA.
  • Banking: Ascredibanco SA, Bancafe, Banco Agrario de Colombia SA, Banco Andino SA, Banco Caja Social SA, Banco Central Hipotecario, Banco Colombo Americano, Banco Colpatria, Banco de Bogota, Banco de Comercio Exterior SA, Banco de Credito SA, Banco de Occidente, Banco del Estado SA, Banco del Pacifico SA, Banco Ganadero SA, Banco Interamericano de Desarrollo, Banco Mercantil de Colombia SA, Banco Mundial, Banco Tequendama SA, Banco Union Colombiano, Bancolombia, Bancolombia, Conavi et Corfinsura, Corpavi, Corporacion Financiera de Transporte SA, Financiera de Inversiones SA, Interbanco, Intercanje Ltda, Istituto de Credito Territorial, Megabanco
  • Construction: Codad, Coviandes
  • Energy & water: ACUACAR, Alcantarillado y Aseo, CET, CODENSA, CORELCA, Ecopetrol (Empresa Colombiana de Petroleos SA), EMGESA, EPSA, INASSA, Metroagua, Termobarranquilla
  • Media: Casa Editorial El Tiempo
  • Telecommunications services: Celcaribe, Cocelco, Colombia Telecom, Comcel, Emcali
  • Transportation services: Aerovias Nacionales de Colombia
  • Financial services: Aliadas CF, Aval Grupo, Caldas SA, CF, CF del Norte SA, CF Popular SA, Compania Financiera Internacional SA, Corfiantioquia, Corfinsura SA, Corporacion Financiera de Santander, Financiera Energetica Nacional SA, Fondo Latinoamericano de Reservas, Suvalor
  • Holding: Exor ex-IFI (Istituto de Fomento Industrial)

Overview Of The Colombian Economy: Until 1997, Colombia had enjoyed a fairly stable economy. The first 5 years of liberalization were characterized by high economic growth rates of between 4% and 5%. The Samper administration (1994-98) emphasized social welfare policies that targeted Colombia's lower income population. However, these reforms led to higher government spending which increased the fiscal deficit and public sector debt, the financing of which required higher interest rates. The economy slowed, and by 1998 GDP growth was only 0.6%. In 1999, the country fell into its first recession since the Great Depression. The economy shrank by 4.5% with unemployment at over 20%. While unemployment remained at 20% in 2000, GDP growth recovered to 3.1%.

Colombia then entered into an agreement with the International Monetary Fund that provided a $2.7 billion guarantee and by early 2000 there had been the beginning of an economic recovery, with the export sector leading the way. The Colombian economy experienced accelerated growth period between 2002 and 2007 due to rise in commodity prices and market-friendly economic policies. Colombia’s growth during that period had helped cut poverty and unemployment by 20% and 25% respectively. Reforms in Colombia’s hydrocarbon sector and the US – Colombia Trade Promotion Agreement also attracted unprecedented foreign investments.

The streets are safer, and citizens are road tripping again. Export-import activity is steadily growing. Tourism has nearly tripled in five years, and beach-lined, historic Cartagena is among South America's most expensive real estate markets.

Negatives Of The Colombian Economic Growth

In 2005 the Bolsa was up 128% (second best in the world that year). It took a 45% dip last year when many emerging markets were hit – second worst loss in the world. It is down 5% in 2007. Bolsa-listed stocks can only be bought with pesos and there are no Colombian mutual funds available to foreign investors. Although murders and other violence is dropping, infrastructure in Colombia continues to degrade and is in need of billions in investment. Many investors are waiting for that to happen to open the floodgates for other markets inside the country.

Colombia Outlook 2010 And Beyond:

The recent landslide victory by Juan Manuel Santos in the Colombian Presidential election is a strong positive for Colombia's economic outlook. Colombia’s economic recovery is gaining momentum, although it is undermined by the recession in Venezuela and a looming global economic slowdown. The IMF’s World Economic Outlook, published in April, estimated that the country would grow 3.13 per cent in 2010-11. While overseas investors are really bullish on the Colombian growth, local analysts feel that job creation is the biggest hurdle in Colombian growth. Analysts consider the current economic model, where industrialization lags and the economy is sustained by hydrocarbon exports and a strong financial sector as the main hurdle for job generation in Colombia.

Future Plans Of Colombia: One of the issues that the Colombian government has been analyzing in an effort to make the country and its businesses more competitive and efficient has been the area of Trade Facilitation. The government’s 2019 plan of action for the country’s internal agenda focuses on the need to improve roads, ports, and airports, reduce red tape and the time it takes to nationalize or export goods. In addition to trade facilitation, there is a serious discussion regarding a comprehensive tax reform that will actually reduce corporate taxes. For medium term or long term investors, Colombia should be viewed as an excellent country for investment and value creation thanks to factors such as improvement security, continued prudent management of the country’s economy.

Disclosure: No Positions