Peru: South America's Hidden Gem

¹²Investing In Peru— South America's Hidden Gem

By Martin Hutchinson, Money Morning | 10 April 2010

When investing in the emerging markets, you need to cast your net beyond the obvious candidates. Granted, China, Brazil and India have emerged to become very attractive investment stories (I don't trust Russia, the fourth and final "BRIC" economy). But everyone else has heard of them, too, which is why their markets have been bid up very high in the past year. Their prospects remain excellent, but you're paying a lot for them.

From time to time, however, a country that has been off investors' radar screens has a few good years, and begins to creep onto them. In such countries, risk may be high, but values at least remain reasonable. That's why it might be worth investing in Peru. For Peru, the only real political risk is social upheaval in the southern provinces.

When U.S. investors look at the countries of Latin America, they do so with great suspicion— and with good reason. Mexico has proved to be a sinkhole for U.S. money for two generations. Argentina hasn't been quite as costly for Americans— even with its recent retirement-fund debacle— but only because the Europeans dived in first. Venezuela has been a disaster and even Brazil has proved very disappointing.

Despite that history, Brazil last year proved just about the best place you could have placed your money. And Chile currently appears not only very attractive, but safe. After all, in an era of perpetually rising commodity prices, doesn't it make sense to invest in commodity-producing countries?

That brings us to Peru.

At first glance, Peru looks mired in the category of countries a U.S. investor should avoid at all costs. If three of the top factors to a market's success are "location, location, location," then Peru has a big strike against it, for it's in a bad neighborhood: Two of its neighbors are Bolivia and Ecuador, places where no sane person would invest a penny, given their awful current regimes.

One of Peru's more recent presidents, Alberto Fujimori, who served from 1990 to 2000, is now serving another term— this one a jail term of 25 years. And quite frankly, the fact that his daughter, Keiko Fujimori, is currently leading in opinion polls for the April 2011 election doesn't add to one's confidence either. Either Fujimori was unjustly imprisoned— in which case the Peruvian justice system is a travesty (the view I incline to)— or he deserved what he got, in which case the Peruvian electorate is dangerously deluded. You can't have it both ways.

Nevertheless, Peru's economy has showed considerable strength in recent years, growing by around 9% annually in both 2007 and 2008 and even managing a little growth in 2009. You need to net out the somewhat-excessive annual population growth of 1.2% to get a per capita growth figure, however, and the country remains relatively poor, with per-capita gross domestic product (GDP) of $8,600 at purchasing power parity (PPP), well below Chile's $14,700 or Brazil's $10,200, for example.

The current president, Alan Garcia Perez, governed as a leftist maniac in the 1980s, but is a somewhat reformed character now, and has left alone most of the property-rights reforms— such as reliable land registry reforms that were instituted by Fujimori in his 1990s decade of rule. Foreign investment is officially welcomed, and corruption remains tolerable— in the 2009 Transparency International Corruption Perceptions Index, Peru ranked 75th out of 182 countries, level with Brazil.

Nevertheless, with commodities prices trending upward, Peru should continue to do well— its Top Four exports are copper, gold, zinc and crude oil, before you get to a group of agricultural products. The Economist team of forecasters predicts growth of just over 5% in 2010 and 2011, and that forecast may prove low if metals and energy prices continue strong. So, on balance, attractive investment opportunities in Peru should be considered.

There are a number of U.S. and Canadian mining companies with operations in Peru, such as Pan American Silver Corp. (PAAS), which should be reasonably safe from expropriation even if metals prices continue to rise. There is also one interesting Peruvian-controlled miner listed on the New York Stock Exchange— Compania de Minas Buenaventura SA (NYSE ADR: BVN)— that benefits from very favorable operating costs in its gold operations at below $300 per ounce and trades at less than 14 times trailing earnings, a very reasonable rating in this sector.

Peru may be emerging as an investment destination; it certainly bears watching. But take care; with an unpredictable election next April and a strong leftist candidate in Ollanta Humala (who lost by only 5% in 2006) there is considerable political risk. Still, there is also upside risk— a victory by Keiko Fujimori would certainly clear up some of the country's ambiguities!