Increase In Pension Fund Investments Makes For Headwinds In Andean Market

Includes: AND, CNCO, GXG
by: Emerging Money

by Joseph Hogue CFA

The Central Bank of Peru announced last week that it will probably raise the limit on pension fund investments in foreign securities by the end of the year. Funds have approached the current limit of 30% on roughly $35 billion in assets as strong economic growth and regional integration increased assets.

The limit was increased four times in 2010 and the Central Bank was given authorization last year to increase the limit to 50%.

The story in itself is not so dramatic but follows on the heals of increased foreign investment limits on pension funds in Chile and Colombia over the last couple of years. Chile's pension fund is almost four times the size of Peru's with foreign investments of $49.1 billion on $134.9 billion.

The prime beneficiary of these increased pension investments could be the equity markets within the Andean region. The three countries integrated their markets with cross-trading through listed brokers last year to better compete against larger exchanges like Brazil and Mexico. The combined market capitalization has increased by 10.17% over the six months to June of this year to $660 billion. While trading volume has been disappointing since the integration, most expect the liberalization of pension investments to be a major factor for the exchange and listed shares.

Strong Names from the Region

Despite the recent weakness in commodity prices, the region continues to be a standout for economic growth and fiscal stability. Companies that will benefit from the rise of a new middle class and domestic consumption should perform well over the long-term.

Cencosud (NYSE:CNCO), one of the region's largest retailers, began trading in New York this year but is down slightly from the issue at $16.25 per share. Still, the future is bright for the company with a diversified mix of supermarkets, home improvement, shopping centers and department stores in Argentina, Brazil, Colombia, Chile and Peru. Fiscal year revenues have grown over an annualized pace of 25% over the past two years and management is planning on an increase of at least 15% this year.

The Global X FTSE Andean 40 (NYSEARCA:AND) was launched February 2011 and invests in the forty most liquid stocks in the integrated market across Chile, Colombia and Peru. Sector exposure mimics the integrated exchange closely with: materials (26.4%), financials (24.3%), consumer goods (12.6%), utilities (12.4%), energy (12.0%), and industrials (10.2%).

While Colombian ADRs continue to be limited to a few names, the Global X FTSE Colombia 20 (NYSEARCA:GXG) continues to be a diversified bet on the general market. The fund trades for about 15 times trailing earnings and pays a 1.0% yield.