It tracks what is South America’s fastest-growing major economy and is coming off a year in which it left the iShares MSCI Brazil Index Fund (NYSE: EWZ) and the iShares Chile Investable Market Index Fund (NYSE: ECH) in the dust, but for some reason it still feels as though the iShares MSCI All Peru Capped Index Fund (NYSE: EPU) is not getting much attention.
That should not be the case. Not with EPU touching a new 52-week high on Thursday. Flirting with $48 means EPU is within shouting distance of its all-time high just over $50 set in December 2010.
While 2013 is still young, noteworthy is the fact that EPU is showing no signs of a hangover from last year’s ebullience. The ETF is up 2.64 percent to start the new year. That may not sound like much, but that gain has been accrued in less than 12 full trading days. Not to mention, the comparable ETFs EPU has outpaced this year reads like a “who’s who” of Latin American funds.
The list of Latin American ETFs trailing EPU includes: ECH, EWZ, the iShares MSCI Mexico Investable Market Index Fund (NYSE: EWW), itself a 2012 star performer; the iShares S&P Latin America 40 Index Fund (NYSE: ILF) and the SPDR S&P Emerging Latin America ETF (NYSE: GML).
Investors that are already familiar with EPU are no doubt unsurprised by the ETF’s continued bullishness. What may be surprising to some is that there is more to the story than just raw materials.
Earlier this week, Peru reported December GDP growth of 6.83 percent, up from 6.71 percent in November. That easily topped the 6.2 percent analysts expected. Many analysts and banks are forecasting Peruvian GDP growth of six percent this year, but even the World Bank’s forecast of 5.8 percent looks good, comparatively speaking.
If the World Bank estimates are accurate, Argentina, Brazil, Chile, Colombia and Mexico will offer GDP growth rates that lag Peru by significant margins.
The December GDP report and the World Bank estimate were released this week, though it feels like hardly anyone noticed. Again, that is arguably surprising because EPU, at various points during its trading history, has shown a tendency to be somewhat sensitive to GDP news.
As was noted earlier, Peru is viewed as a materials play because the country is one of the world’s largest producers of copper, gold and silver. While Chile is the world’s largest copper producer, ECH is not excessively weighted to materials stocks. The opposite is true with EPU, which allocates 50.4 percent of its weight to materials names.
Clearly, there is no getting around the fact that metals demand is an important factor in forecasting EPU’s expected returns. So is the under-appreciated Peruvian banking sector, which represents 27.4 percnet of EPU’s weight. On that note, it is important to realize that Credicorp is EPU’s largest holding at a weight of 21.3 percent.
Exposure to Peruvian banks is an idea worth exploring. Lending growth probably rose 18 percent last year, a rate that some policymakers there view as sustainable in the near-term.
Another point to consider: An acceptable non-performing loan ratio for a bank is in the area of five percent. Peruvian banks had an average NPL ratio of 1.79 percent at the end of November.
Importantly, Peru’s central bank has raised bank reserve requirements five times in the past 10 months as a means of stemming inflation and avoiding a possible credit bubble. Increased reserve requirements appear to be the central bank’s preferred tool for fighting those issues. Peru’s benchmark interest rate stands at 4.25 percent, tied with Colombia for the lowest interest rates among Latin America’s major economies.
On top of all this, EPU is attractively valued. The ETF’s P/E ratio of 15.33 is lower than that of EWZ, ECH, EWW and the iShares MSCI Emerging Markets Index Fund (NYSE: EEM).
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