Peru's Big Decision

By Stephen D. Simpson, CFA | June 03, 2011 AAA

Elections matter in almost every economy, but maybe even more so in Latin America. Several once-promising growth stories have been all but erased in the wake of elections that brought in who promised equality, but delivered little more than shared misery and more corruption. Venezuela is perhaps the best recent example, though there are others. Right now, investors are fretting over what this weekend's election in Peru may hold for the country, its citizens and investors.

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More of the Same or a Turn to the Left?
The June 5 election in Peru has come down to a very close contest between Keiko Fujimori and Ollanta Humala. Ms. Fujimori's platform basically represents a "more of the same" continuation of existing policies; policies that have brought a lot of growth to Peru and considerably more economic stability.

Ollanta Humala is more of an unknown quality. A former military officer, Humala fought against Peru's Shining Path (a Maoist insurgency), but also led an unsuccessful military revolt against the government of Alberto Fujimori - Keiko's father and a former President of Peru now in jail for a host of crimes committed during his administration.

At this point, Humala's rhetoric sounds fairly similar to that of Lula da Silva, the successful past President of Brazil who managed to balance social reform with economic growth. Unfortunately, investors are nervous about Humala's ties to Venezuela's Chavez and Bolivia's Morales - two leftist leaders who have done significant harm to their respective economies with their policies. So far it seems that Chavez and Morales embrace Humala more than he does them, but investors often assume the worst in these cases until proven wrong.

What's at Stake
Peru has been one of the biggest Latin American success stories of recent years. While the rebound in the prices of commodities like copper and gold has certainly helped, Peru has posted strong GDP, controlled inflation and built increasingly strong reserves due to prudent fiscal policies.

Depending upon how the election goes, that could all be up in the air. While there are relatively few publicly-traded Peruvian companies accessible to American investors (that is, trading on U.S. exchanges with direct listings or liquid ADRs), the ramifications could still be significant for them.

Companies like Minas Buenaventura (NYSE:BVN) is a case in point. While Ms. Fujimori has discussed higher taxes on mining companies - often a popular political move with a populace that believes mineral wealth is not shared fairly - that certainly is less troubling that the outright nationalization that could be on the table if Mr. Humala proves more like Chavez or Morales than Lula. Likewise, Southern Copper (Nasdaq:SCCO) has a major stake in the future of Peru's policies towards mining.

Creditcorp (NYSE:BAP) is a company with much broader exposure to the general health of Peru. A large banking company, Creditcorp is like most banks in that its fortunes are tied to the health of the Peruvian economy - with job growth, business creation and inflation being preeminent concerns.

After these three companies, the pickings get slimmer. Cementos Lima (Nasdaq:CEMTY) is technically tradeable, but the volume is almost non-existent. Elsewhere, companies like BBVA (Nasdaq:BBVA), Telefonica (NYSE:TEF) and Bank Of Nova Scotia (NYSE:BNS) all have exposure to Peru, but not to such a high degree that the companies or stocks would be seriously threatened by turbulence or anti-free market moves in Peru.

Few Ways to Play
Unfortunately, investors have limited options when it comes to trading on the lead-up and aftermath to this election, to say nothing of sharing in Peru's economic development. Credit default swaps may be the best vehicle for trading volatility and nervousness (particularly since Peru has the reserves to fight volatility in the currency), but those are not typically available to individual investors.

Likewise, companies like Cerro Verde, Alicorp, Austral Group, Candente Copper, and Ferreyros may be names to watch in Peru, but hardly any American investor is in position to buy those stocks on Lima's exchange. That leaves Creditcorp and the iShares All Peru Capped Index ETF (NYSE:EPU) as perhaps the best options. The ETF is pretty liquid and although extremely weighted towards commodities (nearly 70% of its holdings), it does trade as something of a proxy for Peru in general.

Hope for the Best, Prepare for the Worst
Hopefully the winner of Peru's election will not turn his or her back on the progress made in Peru over the last decade. While inequality and poverty are still major issues, life is better than it was before and a sustained commitment to economic development is a key part of continuing that progress. Investors should be cautious, but Peru is an emerging winner. If the new administration shows a commitment to ongoing economic development, it is a market well worth watching. (For related reading, also take a look at The Latin American Frontier.)

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