Latin American Equities – Still Loving Colombia
While my bullish Latin American fixed income views have played out really well of late, other Latin American asset classes have been much harder to call. A case in point has been Brazil’s Bovespa equity index which, despite the rapid sell-off in April and May is trading pretty much where it started the year. I attribute much of this lack of momentum to uncertainty regarding the ongoing Petrobras share swap agreement, but with my concerns regarding weakness in the US and eurozone – as well as an impending slowdown in China – moving very much to the fore in recent months, I am somewhat surprised that the Bovespa hasn’t had a rockier ride.
That said, technical indicators on the daily chart are starting to suggest that a correction could be looming. Since the start of Q210, the index has consistently posted lower highs, suggesting that upside momentum is on the wane. With support around the 66,000 level now very much in sight, I believe a break here could signal that a period of weakness is on the cards, with support at the 60,000 area the next key level to watch to the downside.
Moving across the continent, however, and Colombia’s benchmark IGBC equity index continues to post record highs in a fashion somewhat similar to the Chilean blue-chip IPSA index. While much initial momentum can be attributed to the improvement in Colombia’s political risk profile following the election of President Juan Manuel Santos on June 20 (11% of gains to the time of writing), I believe Colombia is on a sustainable bull run and will outperform Chile going forward.
Core to this outlook is the sectoral composition of the respective indices, and the heavy weighting of the IGBC towards energy and banking bodes well for a continuation of the current upward trajectory. Colombia’s onshore oil fields are perhaps the most attractive energy prospects in the region, given the unfriendly business environment in Venezuela and Ecuador, making domestic oil companies (such as Ecopetrol) particularly attractive prospects for investors wishing to get exposure to the Colombian growth story.
Moreover, the conservative nature of the country’s banking sector enabled banks such as BanColombia to weather the 2008 global financial crisis better than most regional and global counterparts. Such institutions now stand in a very strong position to benefit from a rising middle class, and higher savings rates encouraged by the rapid growth of pension funds across the nation. Together, I believe the energy and banking sectors will continue to drive the bourse higher and higher.
Of course there is the risk of further uncertainty surrounding global financial markets, which could hamper the IGBC’s performance. But, over a longer time horizon, Colombia’s bright economic outlook should see the IGBC remain relatively resistant to such global economic and financial market headwinds. In short, while I don’t like many equity markets in the region, for the time being I remain very much a Colombia bull.