Silver Shines on Peru ETF

ETF Trends

Granted, it closed just slightly higher, but on Tuesday the iShares MSCI All Peru Capped ETF (EPU) was one of just 13 exchange traded funds to hit a new 52-week high.

“The Peruvian stock market may not be featuring the double-digit total return (10.9 percent) of its Colombian counterpart or the higher, 10.4 percent single-digit performance of Brazil’s IBOVESPA. Nonetheless, Peruvian

shares, having returned an impressive 8.7 percent so far this year that outpaces the performance of Mexican and Chilean equities (2.2 and -0.1 percent, respectively), should proceed to attract foreign investor interest and gain additional upward momentum in the process,” said S&P Capital IQ in a new research note.

EPU, the lone Peru ETF ETF, is up 9.7% this year and some of that upside can be attributed to Peru’s status as the world’s third-largest silver producer and one of the largest gold and copper producers. Those are important considerations when noting EPU’s 50.2% weight to the materials sector. Six of the ETF’s top-10 holdings are materials stocks. [Pleasant Surprise From Peru ETF]

Over the past month, EPU is up 7.2% while the iShares Silver Trust (SLV) is higher by 10.3%. The iPath Dow Jones-UBS Copper Total Return Sub-Index ETN (JJC) is up 7.4% over the same time. However, there appears to be more to EPU’s story than just the rallies in those metals.

After all, the iShares MSCI Mexico Capped ETF (EWW) and the iShares MSCI Chile Capped ETF (ECH) have not really impressed in recent weeks. EWW is up just 1.4% over the past month despite Mexico’s status as the world’s largest silver producer. ECH is down 2.4% even though Chile is the world’s largest copper producer.

“On the macroeconomic front, Peru’s real GDP growth rate may have lurched downward 5.2 percentage points from its ten percent, post-recession, second-quarter 2009 high. Yet, the fact that the economyexpanded at a healthy 4.8 percent clip during the first three months of the year, in the face of debilitating demand from China and elsewhere for the nation’s raw materials, manifests the gradual evolution of the macro-economy from one exclusively dependent on exports to a modestly more mature one that can tap into other sources of growth – namely, direct foreign investment,” said S&P Capital IQ.

In April, the International Monetary Fund forecast 2014 GDP growth of 5.5% for Peru. That compares with 4.5% for Colombia and just 1.8% for Brazil. Brazil and Colombia are South America’s largest economies. The IMF expects Peruvian GDP to rise 5.8% next year and noted the country’s 2.5% rate of inflation is the second-lowest in Latin America behind Colombia. [Peru ETF Looks to Keep up With LatAm Rivals]

There is room for P/E multiple expansion, although Peruvian stocks are pricey compared to long-term averages. Lima-listed shares also traded at a premium to the broader Latin America region.

“At 15.2x 2014 forward earnings, Peru’s price/ earnings ratio (p/e) is well below that of Mexico and Colombia (18.5x apiece), but counter-intuitively above that of Brazil (11.4x) and Latin America (13.5x) – both of which have been oddly outperforming Peru. Furthermore, even though Peru’s p/e exceeds both its historical average (10.5x) and record low (2.8x), it falls short of its all-time high by 13.3 points, leaving considerable room for expansion,” said S&P Capital IQ.

iShares MSCI All Peru Capped ETF

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