Inside the Recent Colombia ETF Surge


Colombia ETFs, which had a rough start to the year and were trading in double-digit losses, are seeing things turn around in their favor. Like many other emerging markets, Colombia was also a victim of Fed taper and faced rough trading in 2013.
Last year, the economy grew by 3.7% -- the slowest pace since 2009. Moreover, a strengthening currency (peso) had adversely hit the country’s manufacturing and agricultural sector causing falling output levels and wages.  
However, things have started to brighten for this Latin American nation. Even though the country’s full year 2013 GDP was disappointing, Colombia’s economy grew at the rate of 4.9% year over year during the fourth quarter of 2013. This growth rate is faster than many other Latin American nations, including Chile, Mexico and Brazil (read: Is the Mexico ETF a Better Play on Latin America?).
Also, the country’s monetary policies are closely aligned to keep the annual inflation rate near the 3% target. Though Colombia recorded an inflation rate of 2.51% last month, the central bank expects inflation to reach an annual rate of 3% with an improving economy.
In fact, the central bank has kept interest rates unchanged at a record low of 3.25% for the past 12 months and has extended its dollar buying program. The bank believes low rates will boost spending within the economy and thereby enhance the country’s GDP growth rate.
Along with a supportive monetary policy, the country’s fiscal policies are also aiming to bolster growth. The government is ramping up its infrastructure program and also focusing more on key areas including mining, education and technological innovation. Moreover, the recently signed free trade agreement with the U.S. has spread optimism among investors as it is expected to create new trade opportunities.
Indeed the country is witnessing a falling unemployment level and an improving trade balance. The unemployment rate fell to 10.68% in February from an 11.1% in January (read: The Comprehensive Guide to Colombia ETFs).
These improving macroeconomic trends along with an emerging middle-class economy made Colombian ETFs witness a smart rally over the past one month.
Three Colombian pure plays - InterBolsa FTSE Colombia 20 ETF (GXG), Market Vectors Colombia ETF (COLX) and iShares MSCI Colombia Capped ETF (ICOL) - have all gained in the range of 10% to 16% over the past one month.
Most of these gains have come in the past 15 days alone.  GXG, COLX, and ICOL have gained around 7.9%, 8.4% and 9.2% in the past two weeks, suggesting a very strong rally as of late (see all Latin American Equity ETFs here).

Bottom Line
The Colombian markets seem to have heaved a sigh of relief on the back of improving economic fundamentals.  The rally might continue for sometime, if the nation continues to divulge encouraging numbers.
For 2014, the economy is expected to grow in the range of 4%–4.5%. Strong domestic demand and consumption along with foreign direct investment are expected to be the primary factors for lifting the nation’s GDP.
Moreover, the strengthening U.S. and Euro economy is expected to support the country’s struggling export sector. The Colombian economy is a major exporter of commodities from the energy sector (oil, coal, natural gas) to the agricultural sector (coffee) while U.S. and Europe are the two largest trading partners of Colombia (read: Will Coffee ETFs Continue to Brew Returns in Q2?).
Given the prospects of further gains, the above three ETFs could be kept on investors’ radar as the clearly have proven to be solid choices for the Latin America market, at least in the short term.
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