Wednesday, June 23, 2010

The DL on EPU - A look into Peru's Mining Exports

With all this talk about the Yuan being unpegged from almighty King Dollar, one may be wondering what type of impact this could have on export driving markets, especially emerging markets. Where should one look to invest that exploits this particular depegging? This article will focus on the wonderful country of Peru and a sneaky little ETF developed by IShares called All Peru Capped, trading under the ticker EPU. The following is a description of the fund and its objectives, copy and pasted from the Bloomberg terminal. “The Fund's objective seeks to provide investment results that correspond to the performance of the Peruvian market, as measured by the MSCI All Peru Capped Index. The Fund invests in a representative sample of index stocks using a "portfolio sampling" technique.” Now with this being said, one may ask why this fund? Why Peru for that matter? Well folks, this article will present a case for investing in the EPU ETF and the reasons why Peru will continue to grow in the coming years.

This past weekend, China decided to stop the Yuan’s peg to the US dollar. This sent stocks soaring at the open on Monday, however all gains would be lost as the day progressed. My thought on this was that people initially assumed it would do wonders for the global economy. However, as investors sat down and took a closer look at it, they realized that China hasn’t said anything to impressive. So this puts us back to square 1 of where to invest. Well my friends, the wonderful country of Peru and an ETF with a ticker EPU is the place to be.

It is theorized, and I stress that word, that the depegging of the Yuan will increase Chinese imports. It may be noted that China is considered one of the largest importers of metals. It can also be said that the major countries that currently provide goods to China will see an increase in demand for their goods, thus boosting exports, and subsequently GDP. Peru, being a large provider of exports, especially in the raw materials sector, is certainly a country that will benefit from the increased demand for raw materials by China. Peru is a large exporter of zinc, gold, copper, and other metals. According to a CIA report, China is involved with 15.2% of Peruvian exports, only second to the US of A. As the Yuan comes down in value, we expect to see this number rise. There has also been recent talk of Petrobras investing money in Peru, Mexico, and Africa. Inpex, a Japanese corporation, has also purchased a 25% stake in a Peruvian oil block. These recent developments of desired investment in Peru has added fuel to the proverbial fire that this is a solid country with strong economic growth potential.

Peru has seen constant strong economic growth for some time now. The central bank just increased its forecast to 6.6% by the end of the year. The graph below shows the growth of the economy, compared to that of the US. Now I realize this may be skewed and you can argue a thousand different things about why US GDP is less but save them. I understand and acknowledge that fact.

This growth in Peru has been largely lead (pun intended) by exports, as mention above. The graph below depicts exports from mining. Notice the constant rising.

Peru also has a low debt to GDP ratio, thus taking away worries of possible default and other financial threats.

Over the past few days, metal prices have increased take copper for example. As the price of copper rises, revenue to exporting countries will see a jump as well.

Now that we have presented a decent case for investing in Peru, the next step in our top down approach will be to examine the etf, EPU. For starters, the EPU etf is comprised of mostly mining companies and other industrial companies, which make up over 63% of the fund. This would naturally be the case, considering that Peru is an export driving country. There are 2 companies that make up over 30% of the fund, Cia de Minas Buenavent (BVN) and Southern Copper (SCCO). BVN has had solid dividend growth of the past couple of years and also has an electric power company and engineering plant. BVN is rising as we speak. Both securities have held up amid recent market turmoil.

All in all, it is clear how strong an investment the country of Peru and the subsequent EPU etf really is. We have presented a typical top down approach from overall macro economic conditions, to the specific country, to a specific industry, and then to a particular investment. Growth will persist in Peru for the coming years and one can certainly bet that EPU will experience similar prosperity.


No comments: