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 69 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 1,590 percent was second only to the 1,718 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.”