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After FARC Vote, Where Is the Colombia ETF Headed For?

The year 2016 is all about referendums in several countries and their adverse impact on stock markets. In June, Brexit derailed the global market momentum (read: UK Votes for Brexit: ETFs Winners & Losers). And now it is a ‘NO’ vote to a peace accord between Colombia's government and the country's largest rebel movement – the Fuerzas Armadas Revolucionarias de Colombia (FARC) – that can deal a blow to regional securities. However, the extent of damage should be of a lesser scale than what we saw during the Brexit referendum.  

On October 2, Colombians discarded a peace pact between the government and the FARC by a narrow margin, with 50.2% of the population being against a peace agreement and 49.8% favoring it. Bloomberg noted that the turnout was only 37%. The outcome came as a shock as several polls indicated at least 60% Yes votes.

As soon as the Colombian voters rejected the peace accord, Colombia ETF Global X MSCI Colombia ETF GXG dropped more than 2.2% on October 3. This is because this negative outcome means “a return to a five-decade conflict, as per President Juan Manuel Santos.”

The poll was to decide if the guerrilla army should be considered in Congress and agricultural reform and be offered lesser punishments for crimes if they surrender their weapons, as per Bloomberg.

Why Was a Yes Vote Important to Market?

One of the directives of the accord was solid investment in rural areas. Since Colombia’s economic progress has so far been limited to the urban section, an overhaul in rural lands should boost economic activities and thus Colombian equities. Also, yes voters expected a step-up in “social programs, including health and education, as well as infrastructure development.”

However, the opposition, led by former president Alvaro Uribe, may consider lighter penalties for several former FARC leaders, who were accused of crimes like drug trafficking and kidnapping. However, they cannot be exempted from punishment.

Market Impact

The outcome of the referendum results wreaked havoc on government bonds and the currency peso. Market watchers’ main worry is that with lesser support, president Santos might find it difficult to pursue the tax legislation – slated for October – required to fix issues in public finances, going by an article published in Bloomberg (read: 4 Best ETFs to Buy for Q4).

According to the finance ministry, Colombia would see one percentage point higher growth rate every year, if the FARC did not frighten away investors and the war did not shift government spending away from more fruitful uses.

Since during the peace treaty, terror threats cooled off a bit in Colombia, markets had reasons to cheer for the yes vote.  Notably, the Colombian GDP grew 0.20% in the second quarter of 2016 over the prior quarter. GDP growth rate in Colombia averaged 1.04% from 2001 until 2016, as per tradingeconomics.  

ETF Movements

GXG is up 24.4% so far this year (as of October 3, 2016) while iShares MSCI Colombia Capped (ICOL) has added about 22.7% in the year-to-date frame (as of October 3, 2016). ICOL shed about 3.3% on October 3, 2016 (read: Best Latin America ETF Bets for 2H16).

What Lies Ahead?

Since the president called for a meeting between all political parties including the ‘no’ clan on how to move ahead from this stage, investors can expect more events in this peace agreement going forward. Apart from political doldrums, Colombia ETFs would seek support from commodity prices as the country is a solid destination to play any surge in the oil, gold, coal and coffee. Thanks to the latest OPEC move on a likely oil output cut in November, Colombia ETFs may see gains ahead if oil prices keep rising (read: 3 Country ETFs Soaring on Hopes of Oil Output Curb).

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