Peru Proves Market Loser as South America's Top-Growing Economy

By Fabio Alves and James Attwood

Aug. 1 (Bloomberg) -- The fastest economic growth and the cheapest stocks in South America aren't enough to lure Wall Street to Peru, where only four companies on the nation's stock exchange trade more than $1 million a day.

The benchmark Lima General Index was the world's third-worst performer last month, falling 16 percent, even though economists surveyed by Bloomberg say Peru will grow faster than Argentina and Brazil. The index, which rose 15-fold from 2000 to 2007, slumped this year as contagion from subprime mortgages drove investors away from emerging markets. The decline accelerated because most of the biggest companies are commodities producers and raw materials prices tumbled in July.

While international funds increased their holdings last quarter to $1.2 billion, the highest this decade, and Standard & Poor's raised Peru's credit rating to investment grade, Citigroup Inc., JPMorgan Chase & Co. and UBS AG say the market is too small to recommend to investors. Lima's exchange trades an average $32 million a day compared with $3.6 billion in Brazil, and $47 billion on the New York Stock Exchange, according to data compiled by Bloomberg.

``If liquidity was not an issue, you would definitely see more people with overweight positions and much more research coverage,'' said Brian Chase, a strategist at JPMorgan in Santiago who has an ``underweight'' rating for Peru, Chile and Argentina. ``We are positive on the long-term economic outlook, but it's hard to be bullish on the stock market because there are few liquid ways to play the domestic consumption story.''

Commodity Focus

Citigroup, which lowered Peru to ``underweight'' on July 14, is the only one of the biggest firms that covers Peru as a separate country, instead of lumping it with Argentina, Chile and Colombia.

Resource companies account for 26 of the 40 stocks in the benchmark index because the country is the world's third-largest producer of copper, zinc and tin, the biggest miner of silver and the fifth-largest of gold. The proportion of domestic metals and energy companies in Peru's market is the highest in Latin America, according to MSCI data.

The Reuters/Jefferies CRB Index of 19 commodities fell 10 percent last month, the steepest decline in 28 years, led by natural gas, nickel and corn. The decline followed a 46 percent increase in the previous year.

``We do like the whole commodity prices story for the long term, but at some stage there will be certainly a decent pullback in commodity prices,'' Geoffrey Dennis, Citigroup's Latin America equities strategist, said in an interview in New York. ``That would put Peru under pressure.''

Southern Copper, Credicorp

The 10 percent decline in copper and the 33 percent drop in zinc from their 2008 closing peaks contributed to the Lima index's 21 percent loss this year. Raw material shares in the MSCI Peru index fell 22 percent in the past three months and will tumble more if commodities continue to slip, John Ditierri, who helps manage $20 billion at Emerging Markets Management LLC, said by telephone from Arlington, Virginia.

The Lima General Index's 16 percent decline in July was exceeded only by Serbia's Belex15 and Ireland's Irish Overall Index.

Peru's companies are cheap compared with stocks in neighboring markets.

Southern Copper Corp., the country's most-traded stock, rose 14-fold since July 2001, almost triple the gain for Brazil's state-controlled oil company Petroleo Brasileiro SA. Southern Copper, the world's seventh-largest producer, trades at 12.1 times trailing earnings, 6.9 percent less than Petrobras.

Credicorp, Inbursa

Credicorp Ltd., Peru's largest financial-services company, advanced almost ninefold in the past seven years, compared with a nearly fourfold gain at Grupo Financiero Inbursa SAB, the Mexican bank controlled by billionaire Carlos Slim. Credicorp trades at an estimated 13.3 times 2008 earnings, compared with 21.7 times for Inbursa.

Stocks are valued at 12.9 times earnings in Peru, a discount to Brazil's 14.2 ratio and Argentina's 15, according to data compiled by Bloomberg.

``Peru has the best trends going forward compared to other emerging markets,'' said Robert Lampl, who manages $4 billion for ING Investment Management in the Hague. He keeps 5.3 percent of his assets in the country. ``Peru's stock market is under-owned and under-invested, so it brings opportunities,'' Lampl said.

Emerging-market funds had 0.8 percent of their assets in Peruvian stocks at the end of the first quarter, the most since 1999, according to Cambridge, Massachusetts-based money flow tracker EPFR Global. S&P raised its credit rating to BBB- from BB+ on July 14.

Economic Expansion

Moody's Investors Service said in May it might boost the country's debt rating, citing the nation's growth. The economy expanded 9.2 percent in the first quarter from a year earlier, matching its quickest rate in almost 13 years, according to Bloomberg data. Last year's figure was the fastest in South America, International Monetary Fund data show.

The economy expanded as President Alan Garcia pared public debt and cut government workers' pay. Construction jumped 34 percent in April on increased spending on housing and roads.

Peru will expand 6.4 percent next year, beating Brazil's 4 percent expansion and Argentina's 3.5 percent, according to analysts surveyed by Bloomberg.

Rising commodities prices pushed sales of copper to a record $828 million in May, 54 percent higher than a year earlier, according to Peru's export promotion agency. Shipments of gold, fishmeal and natural gas also helped boost exports by 31 percent in May.

Paul Van Homelen, who manages about $15 billion in emerging market stocks at Robeco Group in Rotterdam, the Netherlands, has an ``overweight'' allocation on the country.

``Peru has had an excellent performance in recent years, riding on the commodities boom and the appointment of a president that turned out to be the most market-friendly option,'' he said.

To contact the reporters for this story: Fabio Alves in New York at falves3@bloomberg.net; James Attwood in Santiago at jattwood3@bloomberg.net.