Peru ETF in Focus on Interest Rate Cut
A slowdown is palpable in most of the Latin American nations and Peru is no exception. Most of Central and South American countries are rich in commodities which are presently exhibiting a downtrend. Peru was South America’s fastest growing economy having expanded at an average rate of over 6% per annum since 2002 with moderate inflation.
However, the economy has recently slowed down due to a decline in prices for commodities. Notably, Peru is a large producer of precious metals and China is the major user. A slowdown in China has consequently resulted in the sluggish performance by the Peruvian economy.
China normally accounts for about 17% of Peru's exports. Economic growth in Peru was 5.02% in 2013 indicating the slowest rate in four years (read: 3 Industrial Metal ETFs to Buy Amid Weak Global Trends).
The GDP in Peru expanded 1.70% year over year in Q2 from an average 6.3% expansion in the last decade, per Bloomberg. Exports plunged to the lowest level in four years. Investment fell 3.2% in Q2. The private investment slump in Q2 came for the first time in five years.
Thus, to boost the economy, Peruvian Central Bank slashed its borrowing costs to 3.5% on September 11, 2014. Prior to this, the central bank cut its key interest rate by 25 bps to 3.75% in July. Before that, the central bank lowered the key rate in last November after more than four years.
However, consumer prices suddenly nosedived, pushing the annual inflation rate down to the targeted central bank range for the first time in 2014, per Bloomberg. Consumer prices dipped 0.09% in August, a poor trend considering that the central bank’s inflation target is 1% to 3%. The bank expects inflation at around 2% against a projection of 2.8% for 2014. This outlook enables the central bank to go for more accommodative monetary policy, if needed.
The rate cut was probably needed to boost growth as the central bank trimmed its GDP forecast for 2014 from 4.4% to 4% last month. Also, with the greenback climbing and presently hovering around the multi-year highs against the yen, we are likely to see more commodities slump. Commodity-rich Peru has seen weakness in copper and gold prices leading to a drop in mining investments.
What to Expect Ahead?
A drop in inflation came as a boon to Peru as this could prompt further easing in the nation. The central bank believes that through such a stimulus, Peru will be able to clock about 5.8% growth next year. Apart from this, the central bank purchased dollars in August to depreciate its currency against the U.S. dollar, as noted by Bloomberg. A weakening in the currency’s value would give another boost to this export-oriented economy.
Moreover, thanks to a spate of downbeat Chinese economic data, the financial world is now expecting a stimulus measure. If this happens, Peru’s export will gain some strength. It might be worth it to take a closer look at the Peru ETF in anticipation of a brighter future, which we have highlighted below (read: Should You Buy China ETFs on Stimulus Bet?).
iShares MSCI All Peru Capped ETF (EPU) in Focus
Launched in June 2009, EPU is a passively managed ETF to track the performance of the MSCI All Peru Capped Index and is the only option for a pure play in Peru. The fund is home to 25 Peruvian stocks of which materials firms get the major chunk of the asset base with about 49.5% of assets invested (read: Peru ETF Investing 101).
Among individual holdings, the fund appears highly concentrated with about 75% of the asset base invested in the top 10 holdings. The top two holdings get double-digit allocation and the fund does not allocate more than 6.56% to the others. The fund charges investors 62 basis points a year in fees.
EPU lost about 25.7% in 2013 due to muted prices for precious and industrial metals. Since then, the fund has been exhibiting an extremely volatile trend. While the initiation of QE taper and the slowdown in China acted as headwinds for the fund, the global stock sell-off in the beginning of 2014 resulted in appreciation of metal prices.
This in turn helped the ETF which has added about 8% in the year-to-date frame (as of September 11, 2014).
Bottom Line
While Latin America’s biggest ETF iShares MSCI Brazil Capped ETF (EWZ) posted a technical recession in the first half of the year and is still struggling, opportunities like EPU look compelling (read: Will Brazil ETFs and Petrobras Breathe Easy After the Election?).
The nation is presently buckling under pressure, but more than 5% annual growth rate is not all bad in the Latin American pack right now. EPU currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. However, investors should note that Peruvian economy is highly vulnerable to China and commodity strength. So, before being too optimistic on Peru, investors should closely watch Chinese economy data and the commodity market’s performance before making a decision on EPU.
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