The Peruvian Sol in Freefall
It’s a challenging year for the Peruvian sol and stocks of the country. Many Peruvians are anxiously watching the freefall of the national currency and afraid of the value of their savings. For a reason, because the policy of the new president is hazardous and has extremist elements.
As on the charts, the Peruvian sol fell 14 percent in a year in US dollars. The iShares Peru ETF (EPU), containing Peruvian Stocks, decreased 11 percent in the last 12 months and 24 percent only this year. While the iShares Latin America 40 ETF (ILF) surged approximately 19, and the Franklin FTSE Latin America ETF (FLLA) 16 percent.
Three Presidents in a Week
The short answer to why the Peruvian sol and stocks dropped so much is political uncertainty. It began almost two years ago in 2019 already, and the country had three different presidents–in only a week. Then, finally, after many, often violent protests and continued political turmoil, Peru held new elections last Spring.
But in the meantime, Peru was also struck by the COVID-19 pandemics. It is the country with the highest fatality rate per 100,000 people.
The Peruvian sol began to fall earlier, but the election of the new president made things much worse, at least in the eyes of investors. First, Peruvian assets dropped the day after the first round of the presidential elections (April 11, 2021.) Second, even more, the day after the second round (June 6). Third, after the presentation of the new government. (With a controversial far-leftist first minister, Guido Bellido.)
Nationalization, Violence, and Coup?
The investors were scared mainly because of the early program of the president and his party (“Perú Libre,” Free Peru). Because of this extremist ideology, many feared that he would build a communist system, nationalizing much of the companies. (According to his enemies, he also could seize full power through a coup d’état.) In such a system, most investments may lose their value, and the country’s future growth could be thoroughly questioned.
Later, however, the president’s rhetoric eased, and he appointed a moderate left-wing economist to his government as finance minister, Pedro Francke.
Not Cuba Nor Venezuela, But Bolivia
The president and his minister have repeatedly assured the public, they are not planning nationalizations. They are respecting private property and won’t follow the example of Cuba or Venezuela.
Pedro Francke likened the planned economic policy more to Bolivia. There, ex-president Evo Morales taxed foreign mining companies exceptionally, creating resources to strengthen the country’s economy and eradicate poverty. (The tax was raised from 18 percent to 82 percent.) For Bolivia’s broad population, the experiment is likely to be a success, but it has done intensive damage to foreign investors.
How The Fall of the Peruvian Sol Stopped (for Now)
With a milder tone, the Peruvian ruling politicians have achieved that the weakening of the sol has stopped, and equities have corrected end of August and in the first half of September upwards. (The central bank also intervened.) However, the situation stays uncertain. We don’t know what the president and his party can accomplish from their plans. But a source wrote about the role of Francke and the plans of the government:
Francke will likely be tasked with maintaining investor confidence while trying to revive an economy battered by recession and COVID-19. Likely he will prioritize an increase in mining taxes and fight against corporate fiscal evasion to spend more on health and education. However, the plan will need support from the population as the government tries to address uncertainty and a complex political environment. (Foreign Brief)
Weak President, Weak Peruvian Sol?
Foreign investors and citizens with savings in Peru can hope that the president is not strong enough to drastically transform the economy on a socialist basis. Namely, he won the elections only with 50.2 percent and has no majority in Congress.
On July 26, two days before Castillo was sworn in as Peru’s President, an opposition alliance led by Popular Action member María del Carmen Alva successfully negotiated an agreement to gain control of Peru’s Congress (…) Due to the large divisions of parties in Congress, with over eleven parties, whoever was elected into the presidency was expected to be weak. (Wikipedia)
Are Peruvian Stocks a Buy?
The question is, are Peruvian assets undervalued and a good buying opportunity on this price level? Perhaps, but it is not only a question of politics. The two main holdings in the Peruvian EPU ETF are Southern Copper (SCCO) and Credicorp Ltd. (BAP), reaching 45 percent of the fund. (A mining giant and the leading financial group in the country.)
By the data of Yahoo Finance, the “raw materials” sector accounts for 53 percent of the fund. In the Peruvian mines, corporations extract mostly copper, zinc, gold, petroleum, and other metals, ores. Peru is the second-largest copper miner country in the world, behind Chile. A part of the fall of the Peruvian Sol and the stocks can be attributed to the fact that copper peaked in May and dropped since then. (And gold is also suffering since August 2020.)
Is It All About Copper?
Copper is a very valuable resource, and miners may have a bright future. As the International Energy Agency (IEA) suggested,
world copper demand could double over the next 20 years as the pace of electrification grows, with clean energy applications potentially accounting for 45% of overall demand. (NS Energy)
By the way, 88.9 percent of Southern Copper is owned by Mexican mining conglomerate Grupo México. Perhaps, it is not a coincidence the Peruvian president Pedro Castillo is visiting Mexico these days.
My Conclusion: It’s a Buy
Don’t take it as investment advice, but examining the Peruvian politics and economy, and also based on the promising long-term perspectives of copper, I consider Peruvian stocks a buy.
I see few chances of a Cuban or Venezuelan-style communist regime. I think most Peruvian are against extremism and are backing the capitalism in their country. The worst that may happen is the Bolivian way, the over-taxation of the multinational mining companies. But even this scenario may provide high economic growth in other sectors and prosperity in the country. And this scenario may be priced in at stock prices already.
(Cover photo: Peru, Lima, Plaza de Armas)