Market Weakness in January & Investing in Peru

February 2010 investment report for the South America Focus model portfolio at Covestor®

This report corresponds to the South America Focus managed portfolio at Covestor. A description of this Latin-American stock portfolio is also available at, including some other reports. You may read the latest if you open an account at CVIM.

Recent performance

JANUARY 27, 2010 — Several news impacted on this portfolio during the second half of January, up to the point of losing the very good gains achieved before. Commodities and Brazilian equity were affected by China's credit tightening, among other news. The two ETF's following the Brazilian markets that are traded the most in US exchanges, namely EWZ and BRF, fell 10.8% and 13.0%, respectively, as of this writing since the start of the month. I am writing this report on January 27, so the commentary and valuations correspond to this date. We avoided a larger extent of those drops thanks to the caution placed in regards to Brazil. The preference for Chile paid off: ECH, a Chilean ETF, gained 2.8% so far. Nevertheless, the news had a negative effect on two of the remaining themes in our portfolio: agriculture and precious metals. GDX, a proxy for the gold-mining sector, as of this writing lost 14.7% since its high of January 11th, or 7.4% from the start of the month.

Small map of South America
Image courtesy of NASA

These negative developments in Brazilian equity, precious-metal miners and agriculture, resulted in a sharp decline in the value of the model from its early-January high. This portfolio is not market neutral and I am not attempting to time the markets, at least not extensively. I expect value to be built by making use of bullish periods and, hopefully, losing the least we can during the bearish. Therefore, given the very poor performance of the relevant benchmarks, I find our result for the month to be consistent with our strategy, but I wish it were in the green.

There were a few new subscribers reported after the peak. I do not know if CVIM delays this kind of reporting, I just hope they did not enter the model at its highest values. If they did, I doubt it may serve as consolation but bear in mind that the value lost was not consumed by a sales expense or something of the sort: it was a market movement towards a position that, I think, offers more certain prospects. As I commented last month, Brazil was not comfortable with the value of its currency, but this month's developments have helped in that respect. Moreover, new valuations discount a smaller growth in China and, being smaller, it has a higher probability of being reached or surpassed. To summarize, to my understanding, we have moved to a more sustainable point from where to build up more confidently, although it is yet to be seen if the correction is complete.

Are these signs of a second dip?

These corrections around the globe may go on some more, or they may not, but I doubt the losses will extend much

These corrections around the globe may go on some more, or they may not, but I doubt the losses will extend much. China's tightening was a government-controlled measure, probably motivated by concerns over the formation of asset bubbles, which does not seem to be reason enough to extend it to the point of impairing growth significantly. On the other hand, although much can be said about the 'de-risking' of banks as proposed by President Obama, the market response was probably due to the lesser probability of a future big buildup, more than anything else. I also doubt that these news may serve as catalysts that enforce other concerns dangerously, bear in mind that the markets are not depending on high leverage as they were two years ago. This time, valuations were reached thanks to government-injected liquidity, on which there is more control.

I think debt levels are a true concern, but, in any case, although global markets will certainly suffer in the extreme case of a severe credit crisis, South America is not in bad standing with respect to debt. Except Argentina maybe, as it is yet to resolve the remnants of the default of 2001 and may face difficulty if the announced negotiations do not succeed and government enforces poor fiscal policy. If restructuring succeeds and the government acts adequately, then the Argentine markets may rise, but I prefer our portfolio to have no more than a low exposition to this uncertain story, at least for the time being.

Investing in Peru

I recently sold some Chilean equity, to rebalance and to obtain liquidity from positions that had already gone a long way compared to other investments. I think there are opportunities worthy of attention in Peru and in the sectors that suffered the most this month.

I am bullish about the Andean country, it has been improving politically, with a growing middle class, macroeconomic stability and increasing investment inflows, attracted by its mineral and food produce as well as by the fact that it lies between Brazil and its most important customers. This scenario should offer great growth prospects for its leading bank, Banco de Crédito, and the other financial companies in the steadily-profitable Credicorp group (BAP). Nevertheless, BAP has been trading at only 11 to 12 forward P/E, lateralizing since September. For these and other reasons, I decided to open a position two weeks ago. Unfortunately, the climate deteriorated and it has lost some value, but I believe we just need to wait for the proper catalysts and, if the opportunity arises, take advantage by increasing our allocation.

I wish you all a very pleasant February. Let's hope we have more positive news this month, and thanks for subscribing.


You can auto trade this portfolio with Covestor Investment Management. Click here to find out how.

«  January 2010 report  |  March 2010 report  »