GXG Global X MSCI Colombia

Gone are the days when Brazil was the darling of investors when it came to investing in Latin America.  The nation has been struggling with some structural issues for more than a year leaving way for other South American nations to grab investors’ attention. One such country is Colombia.

Of late, Colombia has emerged as an investment hotspot dusting off all is past stigmas including political instability and anti-social activities. Its economic growth is also booming as opposed to stagnant growth in its many other South America cousins. 

Colombia’s commodity-centric economy is getting a thrust from the revival in many developed markets.. Prudent policy reforms, decent growth and favorable debt ratios – have all offered investors a reason to lean on this second biggest economy in Latin America (Read:  Latin America ETFs: Beyond Brazil).

Economic Indicators Roundup

Moderating but Still-Resilient Growth Rate:  Colombian economy grew at 5.9% in 2011, 4% in 2012 and is projected to grow at 3.07%, 4.9% and 4.55% in 2013, 2014 and 2015 respectively (as per the Tradingeconomics). The growth rate as we notice eased through 2013 but is expected to pick up this year.

The economic growth came in at 5.1% in Q3 breezing past other South American nations like Brazil, Mexico, Peru, Chile and Venezuela. Growing household consumption as well as roaring construction, mining and coffee farming activities should contribute to Colombia’s growth in 2014.

Unlike Brazil, the best part in the Colombian economy is the low inflation rate which allows policy makers to go for an accommodative monetary policy to boost growth. The nation has the lowest interest rate in South America and announced a $2.7 billion stimulus package in April 2013, of which about $900 million was spent in 2013.

Colombia slashed its benchmark interest rate seven times in the nine months through March 2013 to 3.25% in the wake of sagging industrial output and a record-low inflation rate since the 1950s. Notably, the annual inflation rate remained below the lower limit of the central bank’s 2–4% target range in the last three months of 2013. This leaves monetary policy room for further easing.        

Commodity-Focus is a Long-term Driver: The Colombian economy is a major exporter of commodities from the energy sector (oil, coal, natural gas) to agricultural sector (coffee).  It has also an upright exposure in the industrial metal production market. The U.S. and the European Union are the two largest trading partners of Colombia (read: 3 Country ETFs to Buy on an Oil Surge).

Though the global commodity market is presently facing pricing pressure, the nation will surely benefit from the commodity boom once the ongoing downturn dies out and consumption in the developed market takes a full swing. Early estimates are revealing that Colombia’s exports in 2013 are expected to beat the government goals. Exports will likely record as much as $58 billion, the second highest in its history.

Weakening Currency is a Windfall:  The currency declines about 8.3% in 2013, registering its biggest fall in five years. The Colombian central bank’s dollar-buying program has also played its role in containing the appreciation of the currency. Further Fed’s dialing back of its QE program in a phased manner should also lead to appreciation of the US dollar against most currencies. This will surely prove as a boon to the all-important export industry of Colombia.

Low Debt-to-GDP Ratio: The country’s debt-to-GDP ratio remained low at 32.30%. While taking about the credit quality, Colombia has got ‘Stable’ credit rating from S&P and Fitch while Moody’s conferred it a ‘Positive’ tag.

A Hot FDI Destination: Given this slow-but-steady scenario, Colombia emerged as a preferred location for investment as far as Latin American investing is concerned. Partial-privatization of the state-owned oil companies – one of the country’s key resources – and opening up of FDI opportunity in oil exploration in large areas of the country without the requirement of government partnership helped Colombia garner sizeable foreign money.
The benign investor outlook on Colombia can be validated by the boom in FDI which more than doubled in the last five years. The nation has roped in over $15 billion in foreign investment in 2012 on the top of $13 billion in 2011. It is the fourth largest FDI destination in Latin America.

How to Play?

For these above-said reasons, the Colombian market has really taken off lately and thus could be a good pick for some emerging market investors who have a high risk tolerance. For those seeking to tap this emerging economy via basket approach, there are three options available at this point of time:

Global X FTSE Colombia 20 ETF (GXG)

The fund looks to track the performance of 20 most liquid stocks in the Colombian market through the FTSE Colombia 20T Index. Currently the fund has invested $110.3 million of assets in 26 holdings. In terms of industry breakdown, financial stocks have 36% weight, followed by energy (23%) and basic materials (15%). The fund charges 68 basis points annually. The fund lost 15% in 2013. The fund also has company-specific concentration risk. GXG currently has a Zacks Rank #3 (Hold).

Market Vectors Colombia ETF (COLX)

COLX seeks to track the Market Vectors Columbic Index, which provides exposure to publicly traded companies that are domiciled and primarily listed in Colombia or derive at least 50% of their revenues from Colombia. The fund charges 75 basis points in expenses.
The ETF currently holds 24 securities and assets about $3.5 million. Here also financial takes up the top spot with about 37% weight, followed by energy at 21% weight and materials at 16% weight. The fund shed 14% in 2013. COLX currently has a Zacks Rank #3 (Hold).

MSCI Colombia Capped ETF (ICOL)

The fund looks to follow the MSCI All Colombia Capped Index to capture the performance of the large, mid, and small cap segments of the broad Colombian market. The fund invests about $19.1 million in assets in 25 holdings. The fund is concentrated in the top 10 holdings which account for more than half of the total (read: iShares Launches Colombia ETF (ICOL)).

The ETF charges a 61 bps in annual fees. Like the other two, this fund is heavily exposed to financials and energy followed by the utilities sector. The most striking part is the fund’s return. The fund debuted in June 2013 and since then the fund returned 6.6%. 

Downside Risks

Colombia has severe unemployment issues. Though down considerably from the peak of 16% to 8.48% at the end of November, jobless rate is still quite alarming. Further, the economy and the funds discussed above are extremely susceptible to the performance of somewhat volatile oil and mining sectors.

Though drugs and security issues are now under control, the country is still not out of the woods. Also, as we progress through 2014, the talk about the ‘zero taper’ and the consequent emerging market slump will loom large. This might create some short-term volatility in Colombian funds as edgy investors might flee the country.

Final Word

Having warned of the negative sides, we would like to conclude that investors must not be bogged down by such issues. Of late, the Colombian finance minister has revised the potential GDP growth rate upward from 4.5% to 5.0%. And in order to attain the likely level of growth, the nation will not hesitate to opt for a rate cut or an easy monetary policy for a prolonged period. So, risk-tolerant investors can try out this growth story in 2014.

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ROCKWELL COLLIN (COL): Free Stock Analysis Report
 
MKT VEC-COLUMB (COLX): ETF Research Reports
 
GLBL-X/F COL 20 (GXG): ETF Research Reports
 
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