Around a 20% gain year-to-date has Peru near the top of Latin American countries as far as stock market performance is concerned. There is also another statistic that has the country near the top of the list - its P/E ratio, which is an impressive 39.1.

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Even with the high valuation, the country is an investment opportunity that should be analyzed further. The country grew by 6.9% in 2011 and is expected to continue with strong growth of 5.5% in 2012. The reason for the slowdown is largely dependent on the issues in Europe and around the globe.

The best option for investors looking to take advantage of the current strength in Peru is via the iShares MSCI All Peru Capped Index ETF (ARCA:EPU). The ETF is a basket of 28 stocks based in Peru. The allocation is heavily concentrated in materials (about 53%) and the financials (almost 23%). The 12 P/E ratio on EPU is less than half of the valuation that is put on the country's index, based on the 28 stocks that it has in its portfolio. The dividend yield of roughly 2.2% and expense ratio of 0.59% are both attractive, considering the makeup of the ETF.

Top Holdings
Credicorp
(NYSE:BAP) is a financial services company based in Peru that also does business in Panama and Bolivia. The stock is up over 16% year-to-date and hit an all-time high in early April. With a PEG ratio near 1.22 and a dividend yield of 1.8%, the stock is considered a value play, fundamentally. Technically, the stock is trying to hold above its 50-day moving average at $127/share. The stock's performance will be closely tied to the growth of the country and its middle class.

Compania de Minas Buenaventura (NYSE:BVN) is a Peruvian gold mining company that also explores for other precious and industrial metals. With a PEG ratio of close to 1.6 and a dividend yield of 1.9%, the stock is valued well versus its gold mining peers. However, with the company so dependent on the price of gold and other metals, it will struggle to move higher until the underlying metals gain steam. I believe in gold as a long-term investment and BVN should benefit from the yellow metal, eventually breaking out above $2000/ounce.

Southern Copper (NYSE:SCCO) is another metal company in Peru that concentrates on mining copper. The stock has struggled recently, with the price of copper falling on worries out of China. The company is heavily dependent on the global growth story; in particular, the emerging markets. A PEG ratio of less than 1.0 makes SCCO a value play. However, it could become cheaper before it finds a bottom. The 2.4% dividend is an added bonus.

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Metals and China
The fate of Peru and EPU is dependent on two main factors: demand for metals and Chinese growth. Nearly 50% of the country's exports in 2010 were copper and gold. If the price of both industrial and precious metals continues its long-term bull market, it would be a big plus for Peru. Directly related to the metals is demand from China. The country accounted for 15.6% of Peru's exports in 2010 and a slowdown in China could significantly lower growth in Peru. In short, Peru is a secondary play on metals and China.

The Bottom Line
As long as the global economy does not fall into another great slowdown or double-dip recession, the demand for metals from China and around the globe will remain strong. This strength will be what drives Peru's economy and stock market higher. If you believe in this theory, EPU and the related stocks should continue to be market leaders.

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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Tickers in this Article: EPU, BAP, BVN, SCCO

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