By Peter Kohli
This week we finish up our series on South American investing alternatives to Brazil (so as not to have investments dependant on the Brazilian economy) with a look at Peru. Previously I looked at Chile and Colombia.
My approach to picks always starts with a focus on the middle class. Is it growing, are they spending, what do they need?
In the past decade, the middle class in Latin America grew 50%, according to the World Bank. As millions work their way up both the social and income ladders, they spend more on personal goods, require more access to credit and finance, and start to demand better and more reliable infrastructure from their governments.
Following a decade of record-high growth, Peru's economy has remained strong and resilient, despite global uncertainty, thanks to strong fundamentals, and supportive trade and policy management, according to the International Monetary Fund (IMF).
Earlier this year, the IMF stated that Peru's economy is forecast to be the fastest-growing economy in Latin America and the Caribbean in 2014. Peru's GDP is expected to grow by 5.5% this year and 5.8% in 2015. The IMF also stated that Peru's 2.5% rate of inflation is the second lowest in the region, after Colombia's.
A study by the Inter-American Development Bank said Peru's middle class has doubled in eight years, and now seven of 10 Peruvians belong to the middle class.
Along with this growth has come an increased demand for personal goods and financial products. According to statistics published by the Superintendency of Banking, bank lending to the private sector jumped 16.6% year-on-year. Much of this increase was fueled by growth in consumer and home loans.
Regarding consumer goods, of course international companies like Procter and Gamble /zigman2/quotes/202894679/composite PG -0.71% are well positioned to take advantage of growing demand, but there are some home-grown companies to consider also.
Alicorp /zigman2/quotes/200747126/delayed PE:ALICORC1 +3.06% is Peru's leading producer of branded consumer goods, including mayonnaise, crackers, pet food, flour, washing powder, juices, pasta and other items found in Peruvian pantries.
Among financial institutions, Peru's largest banking firm is Banco de Credito /zigman2/quotes/209480739/delayed PE:CREDITC1 0.00% . Although Peru's government has pledged to spend more than $10 billion on infrastructure improvements, it's a little difficult for investors to get in on that. One of the most comprehensive development products is Via Parque Rimac, a major transportation infrastructure serving the city of Lima and the district of Callao.
U.S. investors have easier access to ADRs in the infrastructure sector, including Cementos Pacasmayo /zigman2/quotes/207766927/composite CPAC -0.63% and Grana y Montero .
So far, there is only one Peru-focused ETF, iShares MSCI All Peru Capped Index Fund /zigman2/quotes/203445831/composite EPU -1.44% . It holds Alicorp, which is based in Peru, along with Panama-based Peruvian financial holding company Intergroup Financial Services , which owns one of Peru's largest banks.
The fund has further indirect exposure to Peru's finance sector through its holdings in Bermuda-based Credicorp /zigman2/quotes/202158631/composite BAP +0.85% , and investors should note that it holds significant stakes in commodity -focused companies.
Investors can get direct exposure to commodities through the ADR Cia de Minas Buenaventura /zigman2/quotes/200044920/composite BVN -2.78% , the largest owner of mining rights in Peru, or indirect exposure through U.S.-based Newmont Mining /zigman2/quotes/205356474/composite NEM -0.28% , which runs copper and gold mines in Peru. Most commodities rise on a cyclical basis.
From a 60,000-foot view, Peru is still a commodity export-driven economy, with more than 12% of the government's GDP coming from gold mining alone. Any fluctuations in copper, crude oil, iron ore and other commodities, especially gold, will affect the country significantly. Zinc, for instance has recently surged in price; but I wouldn't try to time any Peru plays with a commodity focus, as commodity-bets aren't as directly tied to a country's health, like consumer demand is. Commodity-wise, if you do go that way, Peru's main trading partner is China, followed by the U.S. and E.U. Any slowdown in growth in these areas will impact Peru.