How to Ride the Colombian Bull

Includes: CIB, COLX, EC, GXG
by: Efficient Alpha

The Colombian economy, like much of Latin America, is on a tear and most fundamentals continue to point upward. Fitch, last week, was the third agency to upgrade the country to investment grade. After five years of stalled debate El Colombiano reports that the U.S. Senate Finance Committee will hold a mock markup today to judge support for the agreement. Foreign direct investment increased 50% to 3.23 billion over the last year, primarily to the nation's vast oil and gas industry. Though the Indice General de la Bolsa de Valores de Colombia (IGBC), Colombia's equity index, has increased 16.9% over the last year and 57.1% over the last two years, there may still be a chance for investors to take advantage of this Latin American success story.


Though direct investment in the Bolsa de Valores de Colombia is possible, investors should contact one of the brokers listed on the exchange's website and will need to convert their investment into pesos first. An easier way to invest in equities is through an indexed ETF. Currently, the Global X FTSE Colombia 20 (NYSEARCA:GXG) is the most liquid option available to investors. It reflects the performance of the 20 most liquid equities in the Colombian market. The ETF has returned 27.5 percent over the last 12 months and stocks in the fund have an average price of 19.7 times earnings. The Market Vectors Colombia ETF (NYSEARCA:COLX) is also available but has much lower liquidity with only 2,000 shares traded on a daily basis. It has returned 4.4 percent since March of this year and stocks in the fund have an average price of 22.2 times earnings. Bloomberg reports on Monday that Blackrock's IShares is "days away" from launching a Colombian ETF.

American Depository Receipts for Colombian companies are in extremely short supply. Only two companies are listed on the NYSE, Bancolombia (NYSE:CIB) and Ecopetrol (NYSE:EC) with several other shares traded over-the-counter. Bancolombia is the largest commercial bank in Colombia and one of the largest in Latin America with a market cap of $13.2 B. It pays a dividend yield of 2.2% and has returned 33.7% over the last year. Ecopetrol is one of the four largest oil companies in Latin America with a market cap of $88.2 B and pays an astounding dividend yield of 5.0% and has returned 49.4% over the past year. Ecopetrol produces about 60 percent of the country's oil output which has grown 50 percent since 2006. The government announced May 5th than it would seek to sell 10 percent of its ownership stake, currently 90 percent of the company, to help pay for damages from severe rains this year.


Yields on Colombia's peso-denominated treasury bonds have been falling lately due to muted inflation expectations and an improving credit environment. The July 2024 yields 7.8% and the October 2018 maturity yields 7.4% with a coupon of 11.25 percent. Expectations for inflation have decreased recently to 3.2 percent. Despite a public plea by President Santos to stand pat on rates in favor of a strong economy, the central bank raised rates last week to 4.25 percent.


Whether it's for investment or to hedge exposure, investors should be aware of movements in Colombia's currency, the peso. The peso has appreciated 6.9% this year, the most of six Latin American currencies reported by Bloomberg. Corredores Asociados, a large brokerage in Colombia, predicts a 2011 close for the peso at close to 1,800 pesos to the dollar while Bancolombia estimates a rate of 1,845. Corredores' estimate puts the peso only one percent weaker than its current rate of 1,782 pesos per dollar while purchasing parity puts the forward price at 1,853 or a depreciation of almost four percent. The peso could appreciate further if foreign investment continues at its breakneck pace or oil prices increase significantly. Passage of the free trade agreement with the United States would improve the country's economic prospects and presumably demand for the peso. Downside risks remain in slower world economic growth demanding fewer commodities or a flight to safety by investors from an economic event.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.