Copper’s Comeback Kid: Peru Leads the Field of Emerging Markets to Watch 6
Cusco , Peru - May 25 : participants in the "public education day" held in Cusco Peru on May 25 2011

Remember the excitement over Peru?

In the previous decade, its main stock index outperformed every other equity market in the world. Its copper-fueled economy seemed unstoppable. Headlines enthused over an emerging middle class spending money in shopping malls and Lima’s hot new restaurants and night clubs.

But the crash in commodities in the current decade put paid to all of that. Foreign companies once lauded for helping build roads, schools and health clinics became the enemy. Deadly protests, the likes of which had not been seen since the military took power in the 1960s, flared up against one Chinese mining venture for failing to create more jobs and protect the environment. The heavy-handed military and police response provided further deterrence to once-bullish investors.

Now, it seems, good times may be returning to the Andes. This year Peru’s equity market index is once again the world’s best performing, with a rally of over 34% so far in 2016.

With the country in the midst of presidential elections, the lofty stock market performance belies the political tensions. Both presidential contenders are pro-business and free markets. Keiko Fujimori is the conservative daughter of a jailed former authoritarian president. Pedro Pablo Kuczynski is a centrist ex-World Bank economist.

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Peru’s stock market rallied the most since 2008 as the two candidates defeated leftist Veronika Mendoza in the first round of voting earlier this month. Runoffs for the presidential race will take place in June.

But there’s another reason for taking a look at Peru. It’s harvest time. Not for farmers – but investors.


“Peru is a case of making hay with the grass that you’ve sown a few years ago,” Kieran Curtis, a fund manager overseeing $1.3 billion of emerging market debt assets for Standard Life, says on this week’s Emerging Opportunities show.

“A few years ago it was all about investment, and then the investment began to slow as the projects being funded were nearing completion. That meant a drop in economic growth, and somewhat of a change in market sentiment around Peru. But now these projects are actually completed. They’re starting to produce.”

Most of the production is in copper, Peru’s largest export. By the end of 2017, those projects will increase Peru’s production by almost 90% when compared to the third quarter of 2015.

Such a big jump in exports can normally be expected to drive returns for foreign buyers of local currency. That adds to the allure of domestic bonds, with 10-year yields having reached 7.5% this year, while inflation has been around a third of that level at 2.5%, says Curtis, who holds an outsize amount of Peru’s bonds.

Here are some of Curtis’s other top picks, along with countries where he recommends caution:



Indonesia: Changes to coalitions in Congress last year gave President Joko Widodo much more strength to push through his agenda.

We’ve seen a fall in inflation, which has certainly helped market sentiment and enabled some rate cuts from Bank Indonesia.

But we’ve also seen the government expedite infrastructure spending that Indonesia has needed badly for a long time.

We got our first evidence of this in the first quarter, when government capital expenditure was actually up 300% from the prior year.

Bridge to Nowhere, Samana Bay, Dominican Republic

Dominican Republic: We can get very high yields on domestic assets, in the region of about 10%. And this is for a country that has quite low debt.

Government debt is in the range of 30 percentage-points of GDP, and inflation is in the very low single digits.

The Dominican Republic has been enjoying very strong growth recently, because there’s been some heavy investment in the not too distant past.

The country is enjoying the benefits of investment in tourism. This has been growing strongly because capacity has been added in cruise ship terminals and in hotels.

Then there’s also gold mining. One of the largest gold projects came online a couple of years ago, so that’s driven export revenues as well.

The Sehzade Mosque in Istanbul, Turkey. It is sometimes referred to as the “Prince's Mosque”.

Turkey: There are positives and negatives being created on a daily basis in Turkey.

Potentially, one positive is the Cyprus peace deal, which many people expect might be achieved by year-end.

But really, what concerns us is the structure of financing for the economy. The government has been very careful with its own debt and has paid down as much debt as it can, and has been very fiscally conservative.

But the private sector has borrowed a lot, and actually, if you look at the growth in credit as a share of GDP – the change in that ratio – Turkey is second only to China in the emerging world.

So, this has basically led to Turkey being probably the most vulnerable emerging market to, say, a change in Fed policy to a more aggressive stance, changes in liquidity and foreign-currency funding markets.

Listen to the show here

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