Mid-term prospects for Peru's stock exchange buoyed by metals prices and regional integration plans

Despite being one of the smaller exchanges in South America, the Lima Stock Exchange (Bolsa de Valores de Lima, BVL) has a long history stretching back to 1860. The Tribunal del Consulado, the highest body regulating commerce in the country’s early history, established the Bolsa de Comercio de Lima in 1861. However, the exchange did not trade any type of stock for nearly 30 years until it re-emerged in 1898 as the Bolsa Comercial de Lima. This began the trading of stocks, bonds and notes, with bank and insurance company issuances, as well as government debt, being the most present.

Following a period of global political and economic uncertainty brought on by the two World Wars, the exchange was once again reformed and returned to the name Bolsa de Comercio de Lima in 1952. In 1970 the current BVL was incorporated as a non-profit civil partnership, and modernisation efforts in the 1990s led to the BVL absorbing the Bolsa de Valores de Arequipa, a stock exchange in one of Peru’s other major cities. Continuing its transformation, in 2002 the BVL board of directors resolved to convert the exchange into an equity company effective from January 1, 2003.

Market Capitalisation

Nearly 50 years after its creation, the BVL has a market capitalisation of approximately $164bn, according to June 2018 statements by the bourse. Regionally, this placed the exchange behind Brazil ($838bn) and Chile ($287bn), but ahead of Colombia ($136bn) and Argentina ($67bn). Although it remains small relative to some regional economic powerhouses, the market has exhibited significant growth: the total value of trade on the BVL increased from $30.6m in 1970 to $8.9bn at the end of 2017, with the value almost doubling between 2016 and 2017 alone.

Since the turn of the new millennium, the number of listed companies has grown from 210 in 2001 to 277 as of June 2018. Of these, manufacturing (16%), finance (14%), public service (9%) and mining (8%) are among the most represented sectors. Within these categories, a handful of firms dominate. Southern Copper Corporation, a mining company, comprises almost 25% of the entire exchange’s value at $40.6bn. Credicorp Capital, a local financial services firm, has a market capitalisation of just under $21bn, or 12.7% of the BVL total, and Banco de Crédito, a Peruvian bank, has a market cap of $17.2bn – equal to 10.5% of the total.

2018 Trends

Based on the growth of the global economy and the end of monetary stimulus programmes in more developed nations like the US, investment in equities over bonds is advised in 2018. According to Javier Gutiérrez, vice president of portfolio solutions at Credicorp Capital, Asian stock exchanges registered considerable growth in 2017, making their shares a bit expensive and likely tilting the flow of funds towards Latin American capital markets. “Latin America, despite the growth it has had, is still not as expensive as the rest of the world. For Peru, the external context is very positive for equities,” he told OBG.

Gonzalo Seminario, investment manager of private banking at SAB Seminar, affirmed that emerging markets such as Peru are attractive and fetch good returns. In terms of bonds, both sovereign and company issues will continue to yield more than in advanced economies – although in Peru, returns are below regional averages. “The consensus says that Latin American bonds should yield between 4.7% and 6%, including coupon plus price changes,” Seminario told OBG. “Yields in Peru are between 4% and 4.5%.”

Marco Alemán, investment analyst at brokerage firm Kallpa Securities, told local media in January 2018 that shares would be influenced by two main factors during the year: the price of copper and other metals, and the performance of the construction sector, which is set to recover in line with increased public and private investment. In 2017 the mining sector’s stock index registered an annual increase of 43.33%, while the construction index fell by 10.34%.

On January 24, 2018 the BVL’s General Index recorded 21,246 points, exceeding the 21,000-point barrier for the first time since 2013, while the Select Index – which monitors the 15-most traded securities – recorded a monthly increase of 6.1% in January to 545.5 points, after gaining 26.6% in the whole of 2017. “One explanation of why we are seeing an upswing in 2018 is that companies are pursuing margin improvements and looking for new ways to grow,” Héctor Collantes, vice-president of equities research at Credicorp Capital, told OBG. “The first half of 2018 has shown companies tackling costs, which is something that investors can believe in,” Collantes added.

Furthermore, the resignation of former president Pedro Pablo Kuczynski in March 2018 did not substantially affect local markets, and many stakeholders are upbeat about the current administration led by Martín Vizcarra. Investment analyst Diego Lazo of Protecta Seguros estimates that the BVL will grow between 15% and 20% in 2018, influenced by factors such as metal prices and macroeconomic fundamentals. The exchange grew by nearly 3% in the first quarter of 2018.

Copper Component

Lazo is not the only market observer naming metal prices as a point to watch. Investment bank Credit Suisse affirmed that the global rebound of base metal performance in 2017 resulted in investor optimism, with an increase in average prices expected during 2018. Along the same lines, in August 2017 investment management firm BlackRock indicated that as economies around the world continue to grow and build, demand and prices of industrial metals will rise. Capital spending restrictions and supply-side reforms in China will also prop up the price of metals in 2018, according to the firm.

In Peru there is an historic direct relationship between the price of copper, the BVL and GDP. The country is a major exporter of copper, as well as zinc, thus any uptick in prices benefits local producers. In April 2018 Alberto Arispe, general manager of Kallpa Securities, wrote in a financial blog that the previous six months saw an average copper price of $3.13 per pound, as compared to $2.87 in August 2017. “At these price levels, mining companies generate attractive cash flows and generous returns on equity,” Arispe wrote. Such a boost enhances the performance of the market overall and encourages investors to buy shares in mining companies, resulting in greater funds for exploration or asset purchases.

While higher copper prices lead to increased company funds, which in turn lead to more economic activity and GDP growth, the impact on the BVL is more direct. “Unlike in GDP, where mining weighs 10%, mining has a weight of more than 30% in the General Index,” explained Arispe. This has resulted in a closely correlated performance between copper prices and the point level of the index since 2009. According to Arispe, the overall performance of Peruvian shares is largely explained by the price of copper, coupled with a pro-market economic policy that has welcomed exploration and extraction by private companies. “As long as the price of copper goes up and the second factor is not affected, the prices of Peruvian shares – all else equal – should trend upwards,” Arispe asserted.

Although copper is performing well, Arispe calls on the newly instated government to quiet political vibrations in the economy and encourage investment in additional sectors such as construction. Echoing this view is Collantes from Credicorp Capital, who believes that political developments in the first half of 2018 have had an impact on private sector strategy. “Companies are wondering how much they can decouple from politics,” he told OBG. “While politics is one reason why we are still in the underweight position in Peru, I would say that has not overly pressed the markets, which show valuations near the top from the past three years.”

MILA

While the BVL is the only exchange in Peru, it does not stand alone in the region. Actors from the BVL, the Santiago Stock Exchange and the Colombia Stock Exchange launched the Integrated Latin American Stock Market (Mercado Integrado Latinoamericano, MILA) in May 2011, with the Mexican Stock Exchange joining in 2014. MILA has the goal of developing all capital markets of the member countries by providing investors with a greater choice of securities and allowing issuers to tap funds from multiple sources.

In the first half of 2018 some companies listed on MILA exhibited upward yields due to higher prices of oil, copper, nickel and aluminium, with a good outlook predicted for Copec of Colombia, Southern Copper of Peru and Mexichem. In March 2018 the market capitalisation of the four markets reached close to $966bn, compared to $897bn in November 2017.

Equity Fund

In another act of regional cooperation, May 2018 saw Peru’s Credicorp Capital launch the Latin American Equity Fund. Listed in Luxembourg for greater exposure and initially aimed at global institutional investors, the fund incorporates shares of companies in Chile, Colombia, Peru, Brazil, Argentina and Mexico. The objective of the fund is to capture higher returns for equities on Morgan Stanley’s Latin America Index. Credicorp Capital aims to achieve this by pivoting its investment strategy. “We want to move away from focusing on sectors linked to commodities and shift to companies that are contributing to turning the region into a service economy,” Alfonso Montero, chief investment officer of Credicorp Capital, told press the month of the launch. When analysing a company against the fund’s selection criteria, socio-environmental practices and good corporate governance will join market capitalisation and returns as leading considerations.

While the main fund will be listed in Europe, Credicorp Capital will establish feeder funds in Chile, Colombia and Peru for retail investors to purchase a minimum investment of $1000 in order to participate in the fund in Luxembourg. Credicorp Capital has the goal of raising $40m with the fund in 2018.

Passport of Funds

Yet another regional alliance was proposed in April 2018 when Peru’s Superintendence of Securities Markets, the sector regulator, issued a draft amendment to the Regulation of Mutual Funds for Investment in Securities and Managing Companies. Perhaps the most significant aspect of the draft was its idea to allow investment funds from abroad to operate in Peru. Called the Passport of Funds, the change would apply to entities from countries of the Pacific Alliance and result in increased competition among funds from Peru, Chile, Colombia and Mexico by widening the investor base and allowing more portfolios to be managed by all countries. If passed, implementation is expected to be fairly straightforward, as the passport would allow one country’s fund managers to market in another country with the sole approval of the former’s national regulator. Another factor that will aid cross-border activity is the fact that Peru already has agreements to avoid double taxation with the other three countries.

While Peru, Chile, Colombia and Mexico are already connected through MILA, mutual funds in the four countries vary in size, composition and performance – leading both to new opportunity and risk under the scheme. For example, mutual funds in Peru and Chile had administrative assets of $8.6bn and $55.6bn, respectively, in April 2018, and 439,865 versus 2,398,653 investors. In terms of profitability, mutual funds in Chile average a 50% return, Peru 33%, Mexico 25% and Colombia 15.7%. Assets in the Peruvian market have been growing at an annual rate of 9%, and local financial management group Diviso Fondos estimates that the Passport of Funds will boost that rate to 10% in 2018 and to 11% in 2019.

Outlook

Peru has many of the economic ingredients needed for rapid expansion of the capital market, yet still needs to channel efforts into making the BVL attractive to both businesses and investors. Aldo Fuertes, general manager of Core Capital, believes that one way to help grow the bourse is through engaging more retail participants. “Retail investors should be taxed on their net profits, rather than their gross profits,” he told OBG. “Implementing this would help investment fund management firms attract more retail investors.” The country is indeed working towards this goal through regional integration plans such as the Latin American Equity Fund and the Passport of Funds. The expected increase in participation as a result of these initiatives may be just what the BVL needs to take its performance and competitiveness to the next level.