Colombia (IGBC), Latin America’s murder capital when Pablo Escobar ran the Medellin drug cartel in the 1980s, produced the region’s best risk-adjusted stock returns over the past decade as improved security bolstered economic growth and foreign investment.
The BLOOMBERG RISKLESS RETURN RANKING shows the IGBC index returned 70 percent in the past 10 years after adjusting for volatility, the most among six major benchmark indexes in the region. Colombia, the top performer also over five years and three years, had a volatility-adjusted return of almost six times that of the Bovespa gauge in Brazil in the past decade.
Colombia, which won an investment-grade credit rating last year for the first time since 1999, outperformed as military victories spearheaded by former President Alvaro Uribe turned the tide in a 50-year war with Marxist rebels. Improved public safety lured a record $13.2 billion last year from investors including billionaires Carlos Slim and Eike Batista with companies such as Tabasco Oil Co. and MPX Energia SA. The growing economy swelled the middle class, which will bolster consumer spending and fuel further stock gains, said Frederick Searby, the chief regional strategist at Deutsche Bank AG.
“Colombia has had such a phenomenal peace dividend after going through a wrenching decades-long guerrilla war,” Searby said by phone from New York. “It’s got a sustainable growth story, with a very high investment rate. From a macroeconomic perspective, Colombia is one of the most attractive markets.”
Colombia’s total return of 1,606 percent was second only to the 1,719 percent from Peru’s Lima General Index. It moved to the top spot because it had the third-lowest volatility. Volatility in Brazil’s Bovespa was 34 percent above that for the Colombian gauge over the past 10 years.
Volatility will probably stay low because local pension funds, which generally buy stocks and hold securities, account for 10 percent of trading in the market, said Ed Kuczma, who helps manage $34 billion in assets at Van Eck Associates in New York. Foreign investors accounted for 35 percent of trading last year in the Bovespa, compared with 7.5 percent in Colombia.
“Pension funds continuously invest in the equity of their own country,” Kuczma said. “When you get a big or even a regular size sell-off, they are very quick to put a floor into the market.”
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period of time, increasing the potential for unexpected losses.
“The perception of Colombia is very different than what it was a decade ago,” said Jose Fernando Restrepo, the head analyst at Interbolsa SA, Colombia’s biggest brokerage. “The country is in an upward growth trend” and attracting new companies and investors into the stock market, he said.
President Juan Manuel Santos, who took office in August 2010 after serving as defense minister from 2006 to 2009, and Uribe, the president from 2002 to 2010, have drawn investment by curtailing homicides and weakening rebel groups.
The government’s stepped-up attacks on the Revolutionary Armed Forces of Colombia, or FARC, after almost five decades of battles helped cut the group’s membership to about 8,000 from a peak of 17,000 in 2002, according to Defense Ministry data. The annual number of murders dropped by almost half from 2002 to 2011 as kidnappings declined 89 percent.
The government forecasts foreign direct investment may rise to $16 billion this year, more than five times the levels of a decade ago. The economy’s 5.9 percent growth last year was the fastest since gross domestic product jumped 6.9 percent in 2007, the most in 30 years. The central bank forecasts South America’s fourth-biggest economy may grow as much as 6 percent in 2012.
While Venezuela’s return adjusted for volatility exceeded Colombia’s in the past decade, trading was limited. About 142 million bolivars ($33 million) in stocks changed hands last year in Venezuela, according to data from the Caracas stock exchange, compared with average daily volumes of $92 million in Colombia and $3.9 billion in Brazil.
“Until not too long ago Colombia was considered somewhat of a failed state,” Santos, sitting between U.S. President Barack Obama and Brazilian President Dilma Rousseff, told hundreds of business leaders gathered April 14 for a summit in the resort city of Cartagena. “Things have changed.”
Medellin was for many years the murder capital of Latin America, registering 6,349 homicides in 1991, when the war between cartels for control of the drug trade was at its height. Escobar was killed 18 years ago by a special task force Colombia created to track him down. Homicides in Medellin fell to 1,649 in 2011, according to government data.
Drug violence also led to the assassination of presidential candidates such as Luis Carlos Galan, who led polls in 1989 when he was shot dead near Bogota.
The limited number of investment options in Colombia have driven valuations to relatively high levels, limiting the potential for future gains in the short term, said Francisco Alzuru, who helps manage about $200 million in emerging-market assets at Hansberger Global Investors in Fort Lauderdale, Florida. Stocks in Colombia’s IGBC trade at 14 times trailing 12-month earnings, compared with a ratio of 12.7 for Brazil’s Bovespa.
“It creates pressures that might not exist in other countries,” Alzuru said. “The stocks don’t offer as much value as others in the region.”
‘Wanting to Stay’
Since 2008, the government has played on the word “risk” to invite travelers to its cities, jungles and beaches. An international advertising campaign uses the slogan: “Colombia: the only risk is wanting to stay.”
Colombia last year garnered an investment-grade credit rating from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, 11 years after it was cut to junk when violence and a banking crisis helped trigger six straight quarters of contraction beginning in 1998. The extra yield investors demand to own Colombian government dollar debt instead of U.S. Treasuries is 149 basis points, or 1.49 percentage point, according to data from JPMorgan Chase & Co. That compares to 184 basis points in Brazil, 187 for Mexico and 968 for Argentina.
Attacks on pipelines, roadways and bridges fell to 196 in 2011 from more than 900 in 2002, according to government figures. Improved security helped draw investment from Slim’s Grupo Carso SAB, which bought a stake last year in Geoprocesados SA’s Tabasco Oil. Batista is investing in coal through MPX Energia.
The country seeks to boost crude output to 1.5 million barrels a day by 2020. Production increased 7.2 percent in March from a year earlier to 951,000 barrels a day.
Celsia SA, a holding company that is now focused on energy projects, handed investors a risk-adjusted return of 148 percent in the past decade, the most among members of the IGBC. Mineros SA, Colombia’s largest gold producer, posted a risk-adjusted return of 116 percent as prices for the metal soared.
Bancolombia SA (BCOLO) and Banco de Bogota SA, the country’s biggest and second-biggest banks, Grupo de Inversiones Suramericana SA, Latin America’s largest private pension-fund manager, and Grupo Nutresa SA, Colombia’s biggest food producer, were also among the 10 top performers in the index as the growing economy buoyed consumer spending and credit demand.
Investors are focused on companies in growing economies such as Colombia’s, where consumer spending is picking up, according to Deutsche Bank’s Searby. Retail sales jumped 23 percent in April 2011, the most since January 2000 when Bloomberg records begin, and have risen every month since October 2009.
“People are playing the consumer story on this idea that commodity prices stay high and you get this multiplier effect of GDP growth,” Searby said. As more Colombians enter the middle class, they’re “going from consuming almost none of these products, whether its financial services or retail, to consuming quite a bit,” he said.