Colombia Proves Latin America’s Best Equities Since 2.002

The IGBC index returned 70 percent in the past 10 years after adjusting for volatility, the most among six major benchmark indexes in the region. 

Colombia, the top performer also over five years and three years, had a volatility-adjusted return of almost six times that of the Bovespa gauge in Brazil in the past decade.

Colombia, which won an investment-grade credit rating last year for the first time since 1.999, outperformed as military victories spearheaded by former President Alvaro Uribe turned the tide in a 50-year war with Marxist rebels. 

Improved public safety lured a record $13.2 billion last year from investors including billionaires Carlos Slim and Eike Batista with companies such as Tabasco Oil Co. and MPX Energia SA. 

The growing economy swelled the middle class, which will bolster consumer spending and fuel further stock gains, said Frederick Searby, the chief regional strategist at Deutsche Bank AG.

“Colombia has had such a phenomenal peace dividend after going through a wrenching decades long guerrilla war,” Searby said by phone from New York. “

It’s got a sustainable growth story, with a very high investment rate. 

From a macroeconomic perspective, Colombia is one of the most attractive markets.”

Volatility Outlook

Colombia’s total return of 1,606 percent was second only to the 1,719 percent from Peru’s Lima General Index. 

It moved to the top spot because it had the third-lowest volatility. 

Volatility in Brazil’s Bovespa was 34 percent above that for the Colombian gauge over the past 10 years.

Volatility will probably stay low because local pension funds, which generally buy stocks and hold securities, account for 10 percent of trading in the market, said Ed Kuczma, who helps manage $34 billion in assets at Van Eck Associates in New York. 

Foreign investors accounted for 35 percent of trading last year in the Bovespa, compared with 7.5 percent in Colombia.

“Pension funds continuously invest in the equity of their own country,” Kuczma said. “

When you get a big or even a regular size sell-off, they are very quick to put a floor into the market.”

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. 

A higher volatility means the price of an asset can swing dramatically in a short period of time, increasing the potential for unexpected losses.

Changed Perception

“The perception of Colombia is very different than what it was a decade ago,” said José Fernando Restrepo, the head analyst at Interbolsa SA, Colombia’s biggest brokerage. “

The country is in an upward growth trend” and attracting new companies and investors into the stock market, he said.

President Juan Manuel Santos, who took office in August 2.010 after serving as defense minister from 2.006 to 2.009, and Uribe, the president from 2.002 to 2.010, have drawn investment by curtailing homicides and weakening rebel groups.

The government’s stepped-up attacks on the Revolutionary Armed Forces of Colombia, or FARC, after almost five decades of battles helped cut the group’s membership to about 8,000 from a peak of 17,000 in 2002, according to Defense Ministry data. 

The annual number of murders dropped by almost half from 2.002 to 2.011 as kidnappings declined 89 percent.

Economic Growth

The government forecasts foreign direct investment may rise to $16 billion this year, more than five times the levels of a decade ago. 

The economy’s 5.9 percent growth last year was the fastest since gross domestic product jumped 6.9 percent in 2.007, the most in 30 years. 

The central bank forecasts South America’s fourth-biggest economy may grow as much as 6 percent in 2.012.

While Venezuela’s return adjusted for volatility exceeded Colombia’s in the past decade, trading was limited. 

About 142 million bolivars ($33 million) in stocks changed hands last year in Venezuela, according to data from the Caracas stock exchange, compared with average daily volumes of $92 million in Colombia and $3.9 billion in Brazil.

“Until not too long ago Colombia was considered somewhat of a failed state,” Santos, sitting between U.S. President Barack Obama and Brazilian President Dilma Rousseff, told hundreds of business leaders gathered April 14 for a summit in the resort city of Cartagena. “

Things have changed.

The limited number of investment options in Colombia have driven valuations to relatively high levels, limiting the potential for future gains in the short term, said Francisco Alzuru, who helps manage about $200 million in emerging-market assets at Hansberger Global Investors in Fort Lauderdale, Florida. 

Stocks in Colombia’s IGBC trade at 14 times trailing 12-month earnings, compared with a ratio of 12.7 for Brazil’s Bovespa.

“It creates pressures that might not exist in other countries,” Alzuru said. “The stocks don’t offer as much value as others in the region.”

‘Wanting to Stay’

Since 2.008, the government has played on the word “risk” to invite travelers to its cities, jungles and beaches. 

An international advertising campaign uses the slogan: “Colombia: the only risk is wanting to stay.”

Colombia last year garnered an investment-grade credit rating from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, 11 years after it was cut to junk when violence and a banking crisis helped trigger six straight quarters of contraction beginning in 1.998. 

The extra yield investors demand to own Colombian government dollar debt instead of U.S. Treasuries is 149 basis points, or 1.49 percentage point, according to data from JPMorgan Chase & Co. 

That compares to 184 basis points in Brazil, 187 for Mexico and 968 for Argentina.

Attacks on pipelines, roadways and bridges fell to 196 in 2011 from more than 900 in 2.002, according to government figures. 

Improved security helped draw investment from Slim’s Grupo Carso SAB, which bought a stake last year in Geoprocesados SA’s Tabasco Oil. Batista is investing in coal through MPX Energia.

Oil Output

The country seeks to boost crude output to 1.5 million barrels a day by 2.020. 

Production increased 7.2 percent in March from a year earlier to 951,000 barrels a day.

Celsia SA, a holding company that is now focused on energy projects, handed investors a risk-adjusted return of 148 percent in the past decade, the most among members of the IGBC. Mineros SA, Colombia’s largest gold producer, posted a risk-adjusted return of 116 percent as prices for the metal soared.

Bancolombia SA (BCOLO) and Banco de Bogota SA, the country’s biggest and second-biggest banks, Grupo de Inversiones Suramericana SA, Latin America’s largest private pension-fund manager, and Grupo Nutresa SA, Colombia’s biggest food producer, were also among the 10 top performers in the index as the growing economy buoyed consumer spending and credit demand.

Consumer Spending

Investors are focused on companies in growing economies such as Colombia’s, where consumer spending is picking up, according to Deutsche Bank’s Searby. 

Retail sales jumped 23 percent in April 2.011, the most since January 2.000, and have risen every month since October 2.009.

“People are playing the consumer story on this idea that commodity prices stay high and you get this multiplier effect of GDP growth,” Searby said. 

As more Colombians enter the middle class, they’re “going from consuming almost none of these products, whether its financial services or retail, to consuming quite a bit,” he said.