Higher oil prices, if sustained, will help to fuel economic growth in Colombia. The country also will benefit if the government’s promise of substantial infrastructure spending materializes.
“If those two factors fall into place, the outlook for Colombia will be good,” says Mark Mobius, executive chairman of San Mateo, Calif.-based Franklin Templeton Investments Corp.’s emerging markets group in Singapore.
In addition, Christine Tan, chief investment officer with Excel Investment Counsel Inc. in Mississauga, Ont., expects higher coal prices to benefit Colombia. The country has the largest coal reserves in Latin America and is one of the world’s biggest coal exporters. While oil accounts for approximately 40% of Colombia’s total exports, coal accounts for 14%.
The approval of a revised peace accord and ceasefire with the Revolutionary Armed Forces of Colombia (a.k.a. FARC) also should be a positive development. Although Colombian voters rejected the peace accord in October, Tan says, “FARC shares the government’s intentions to maintain the peace accord and ceasefire, although implementation might prove to take longer than expected.”
Tan, however, cautions that high interest rates and sluggish domestic economic growth have offset the positive developments in Colombia and consumer sentiment remains muted, a result of the government increasing interest rates to keep inflation in check.
The International Monetary Fund projects Colombia’s real gross domestic product (GDP) will grow by 2.7% in 2017, up from an estimated 2.2% in 2016. This growth rate still is well below the country’s average growth rate – 4.5% in the previous three years – due largely to lower oil prices.
From an investing standpoint, Tan notes, Colombian equities are trading at approximately 11.3 times forward consensus earnings, a slight discount to the MSCI emerging markets index, vs expected earnings growth of 16%-18%.
Mobius points out that Colombian stocks are relatively cheap, based on a five-year historical view: “There are bargains to be had for those investors willing to ride out the current uncertainties.” He favours the consumer durables sector because of its tendency to withstand economic problems, as well as export-oriented companies because of Colombia’s relatively weak peso.
Tan, on the other hand, favours the country’s “infrastructure spending theme, as Colombia is only at the beginning of a very ambitious US$70-billion infrastructure spending plan spanning up to 2035.” She says the government expects to add approximately 1.3- to 1.5 percentage points to GDP growth annually through infrastructure spending ranging from four-lane highways to expansion of shipping ports, airports and railways.
One company that will benefit, says Tan, is Cementos Argos SA, the largest cement company in Colombia. She cites the strong infrastructure spending pipeline and an increase in cement prices. Tan also likes Bancolombia SA, Colombia’s biggest bank. Its net interest margin is improving because of recent interest rate hikes. Longer term, the bank will benefit as the low use of financial products in the country rises.
A recent report from Bank of Nova Scotia’s equities research team in Toronto gives an “overweight” rating on a different bank, Grupo Aval SA. Its stock is trading at 1.7 times book value (vs the report’s target of 1.9 times) and has a 5.8% dividend yield.
Energy offers other investment opportunities in the wake of the FARC peace treaty. The Scotiabank report states the numerous zones that were bypassed during the conflict “could be brought into production in relative short order.” One likely beneficiary is Gran Tierra Energy Inc.
A recent report from J.P. Morgan Chase & Co. mentions Avianca SA, Colombia’s national airline, citing cost-reduction initiatives and improving demand. The report also states the company is an attractive takeover target for larger players.
© 2017 Investment Executive. All rights reserved.