A few years ago, anyone that mentioned investing in Colombia would likely draw laughs or skepticism, especially from the general populous, but for those looking for the next frontier of BRIC-type growth opportunities, Colombia is at the top of the list. Under Uribe, the country has started to emerge from the veil of kidnappings and corruption to recognition that Colombia is a real player in the world economy.
The case for Colombia:
Free Trade Agreement:
Currently, there is much consternation and debate over the proposed Free Trade Agreement with Colombia. As usual with our disingenuous politicians, this is much ado about nothing and it comes down to pandering and politicking. Some little-known facts are that the U.S. has actually been engaged in free trade with Colombia for several years, but on a one-way basis only. As an incentive to allow Colombia to prosper by trading with the US, the expectation was that this opportunity would allow Colombia to fight the drug cartels, and this effort seems to have been successful, given recent results. Since the 1990's and without interruption, a can of coffee or a banana sold into the U.S. from Colombia has entered duty-free with no tariffs, while a tractor or bottle of soda made in the U.S. and sold into Colombia has faced a tariff of anywhere from 10-20%. Without going off on a political or economic rant, it's generally accepted by any economist worth their salt that the benefits of free trade greatly outweigh any negative consequences on an aggregate basis...the theory of competitive advantage, documented cases of free trade with Mexico, etc...Unfortunately, Congress recently scuttled the Colombian Free Trade Agreement, but in time, logic will prevail and this FTA will come to pass and Columbia will reap benefits beyond those of its existing strengths.
It's the Economy Stupid!
Colombia's economy has experienced positive growth over the past several years including 6.5% GDP growth in 2007. The economy is booming due to the government's ability to reduce public debt levels, shift to an export-oriented economy, reign in crime, and our favorite development of the decade: high commodity prices. While the unemployment rate stands at about 10%, that's no different than a typical level in Western Europe of late (9% in Germany, 8% in France). The primary risk facing the local economy is concern over continued failure of the US Congress to approve the FTA.
How to invest in Colombia:
As it stands now, you have only one option and it's a good one: Banco de Colombia (BIC). While the shares are up 3500% since late 2001 and it's unlikely to see another 34x return any time soon, can the stock outperform the US and emerging market indices? Surely. It has continued to do so this year as evidenced by the following chart. Note the 40% return for CIB vs. 20% for EEM, the Emerging Markets ETF, followed by the dismal -7% return for the S&P500 during the prior 1 year period.
Banco de Colombia Analysis:
Analyst Coverage: The shares have virtually no analyst coverage and there are rarely news items published aside from company filings. As of now, there are only 2 analysts on the stock and they are both positive on the stock with a "buy" and an "outperform". The past two actions in 2005 were upgrades and newly initiated coverage in 2006 was "outperform".Beta: Interestingly, even given the massive runup over the years, the Beta for the stock is less than 1, at .89, so it's not as risky a proposition as you might envision.
Dividend: The stock sports a 2.9% dividend, which is OK for a bank stock.
Earnings: BIC recently reported earnings of Ps. 425.0 billion for the first four months increasing 56.6% as compared to the same period of 2007. It's difficult to gauge earnings vs. street consensus with virtually no coverage from the street, but judging by the continued ascent in share prices of late, the smart money likes what they're seeing. The shares are slightly off the all-time high of $44 per share at $40 per share.
Outlook: Given the increase in the standard of living and continued strong GDP growth in Colombia, as well as decreasing inflation, I expect the stock to continue to perform well in spite of a deferral on the FTA. In the event the FTA comes to pass in the future, expect even bigger things from Banco de Colombia.
Disclosure: The Everyday Finance portfolio currently has no position in CIB and does not intend on purchasing shares during the next 5 trading days.
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