A regional platform: Three countries come together to create the Integrated Latin American Market

Regional integration is a theme of growing importance for Peru and its Pacific coast neighbours. As Brazil seeks to solidify its position as the South American superpower, the continent’s smaller economies have found that the best way to compete is by working together. This is particularly true in the case of Chile, Colombia and Peru. In May 2011 these three nations took an important step towards promoting regional financial integration with the creation of the Integrated Latin American Market (Mercado Integrado Latinoamericano, MILA).

The MILA brings together the Santiago Stock Exchange (Chile), Colombia Stock Exchange (Bolsa Valores de Colombia, BVC) and Lima Stock Exchange (Bolsa de Valores de Lima, BVL) into a single trading platform, which is intended to facilitate greater capital flows between the participating nations, attract more capital from abroad and encourage a greater number of initial public offerings.

The new exchange is the largest in the region in terms of companies listed. However, with a market capitalisation of around $720bn, the MILA is not likely to catch up with Brazil’s $1.5trn exchange, the Bovespa, any time soon. Sceptics also claim that the MILA does not go far enough to promote integration. Nonetheless, as the second-largest stock exchange in Latin America in terms of market capitalisation, the MILA indisputably holds potential to become an important regional player in the years to come.

PERFORMANCE: Since the MILA was launched on May 30, 2011, the exchange has been off to a fairly slow start. While daily trade volumes were forecast to be $30m by September 2011, the four-month total trade volume had only reached $2m. Some of the initial trades could be considered more “symbolic” than anything else, as Colombian brokers purchased shares in Peruvian zinc producer Volcan, as well as shares in the Chilean airline LAN.

Many credited the MILA’s slow start to concerns over Peru’s presidential elections, which took place in June 2011. Initially, investors were hesitant to see how then-president-elect Ollanta Humala, a leftist candidate, would manage the pro-market policies put in place by his predecessors. Several months later, investors feel more confident that Humala’s performance indicates his commitment to supporting the growth of the private sector.

Additionally, investors’ concerns over emerging market equities in general have calmed as markets in the global south continue to outperform their northern neighbours. Growing confidence is likely one of the factors behind an increase in MILA trading volumes. In February 2012 a total of $8.67m in transactions were executed on the exchange, up 8.53% from the previous month.

REGULATION: Apart from concerns over the political transition in Peru, regulatory issues are also to blame for the MILA’s puttering performance. Colombia, Chile and Peru have different tax policies in regards to equity sales and purchases, as well as capital gains. MILA participants will ultimately have to resolve this issue to support the exchange’s continued growth.

Another concern is the need to conduct dual currency exchanges in order to purchase stock from a participating nation. For example, a Peruvian investor wishing to purchase shares in a Chilean company must first convert new Peruvian sols to US dollars, and then change dollars to Chilean pesos. This causes investors to lose time and money, as they must pay bank commissions for both currency exchanges.

Roberto Flores, the head of research at Inteligo SAB, an equity research firm based in Peru, told OBG that he expects the currency exchange issue to be resolved by May or June 2012, thus making it possible for a Peruvian investor to buy Colombian shares using Peruvian sol, for example.

THE PERUVIAN ADVANTAGE: Despite some of the initial challenges faced by the MILA, Peru stands to benefit the most from the exchange in the long run. Alonso Segura, chief economist and head of strategy at Banco de Crédito del Perú (BCP), explained to OBG, “I think it is like when you look at free-trade agreements; the smaller party often accrues the greater benefit. In this case, the BVL may mean relatively little to Colombia and Chile, but it means a lot to us”.

Indeed, the BVL is small ($134.35bn in market capitalisation) in comparison to the Colombia Exchange ($254.71bn) and Santiago Exchange ($316.79bn). It is also heavily concentrated in the mining sector. Joining the MILA makes Peru part of a larger and more diverse exchange and also gives it access to Colombia’s large assortment of energy stocks and the Santiago Exchange’s emphasis on companies working in retail. It also creates greater liquidity.

Hugo Perea, chief economist at BBVA Continental told OBG, “Before, a foreign investor would worry about being able to get out of their position if they bought shares in the BVL. The MILA opens the market up to a greater number of buyers and thus may help to allay some of these concerns.” “REAL” INTEGRATION: Some critics of the MILA say it does not go far enough to promote “real” integration. After all, the MILA in its essence is not a merger of three stock exchanges; rather, it is an integrated trading platform that promotes transactions across the participating countries without moulding their equity exchanges into a single unit.

Carlos Anderson, an economist and partner at the London-based corporate finance advisory firm, Europa Partners, told OBG that he “would really like to see something like Euronext on the continent”. This is in reference to the NYSE Euronext exchange that was formed by the merger of bourses in Belgium, the Netherlands, France, Portugal and the UK. Euronext was purchased by the New York-based NYSE Group (owner of the New York Stock Exchange) in 2007. In 2011 the German Deutsche Börse took 60% ownership of NYSE Euronext. As Anderson pointed out, Euronext is the ultimate example of financial market integration. “In North America and Europe, you have lots of consolidation – one exchange being bought by another. Once that happens you have real integration,” said Anderson.

BVL & BVC MERGER: To this end, the possibility of creating a merger between the BVL and Colombia’s BVC has been discussed in the past, though this plan is currently on hold. The merger proposal was first announced in January 2011. According to the agreement, the BVC would have acquired a 64% share of the new company, with BVL retaining 36% ownership.

Post-election jitters in Peru led to the postponement of the merger in June 2011. At the time, the BVL and BVC claimed that the postponement would allow them the opportunity to present the idea for the merger to President Humala. There is no news on whether the merger plans will be revived in the future. However, in their initial announcement, the BVL and BVC emphasised that the merger would not affect the exchanges’ involvement in the MILA.

While the BVL accounted for only 4.45% of MILA transactions in February 2012, equity analysts expect this figure to grow in the short to midterm. According to Flores, “The first stage of the MILA was really focused on educating ourselves and investors about the exchange, and how to invest in Chile and Colombia. A year ago we knew very little about the companies and sectors represented in these countries. Now, we have a better idea and are able to start recommending shares in these markets. I assume the same is true for analysts in Colombia and Chile that are getting to know the BVL.”

Sorting out issues related to taxes and currency exchange will also help to drive down the costs associated with trading on the MILA, and thus aid in the effort to increase trade volumes. Another important development for the MILA is the creation of mutual funds specifically designed to invest in the exchange. Only shortly after the MILA launched in May 2011, ING Group announced the arrival of a new mutual fund, ING Mercados Integrados FMIV, designed to invest in the MILA over the long term.

Before the start of the MILA, in February 2011, Global X Funds announced the creation of the Andean 40 ETF, which invests in the exchange’s 40 biggest companies. Finally, Mexico is also considering joining the MILA, announcing its “intentions to explore the requirements of membership” in January 2012. With a market capitalisation of $450bn, the Mexican Stock Exchange is the third-largest bourse in Latin America, after Brazil’s exchange and the MILA.

Flores told OBG that he expects Mexico to “wait and see how the MILA goes before following through with its intentions. But as the second-largest economy in Latin America after Brazil, this is definitely good news for the MILA and for Peru.”

As the MILA continues to advance in the coming years, its growth will push international investors to consider options outside of Brazil, which is also considering joining, when it comes to investing in Latin America. This could be a great boon for Peru in its quest to further develop its capital markets sector.