Peru ETF Confronts Politics

Thanks in large part to soaring precious metals prices, the iShares MSCI All Peru Capped Index Fund EPU is up nearly 48.7 percent this year. That is better than triple the returns offered by the iShares S&P Latin America 40 Index (ETF) ILF and more than 11 times the performance of the MSCI Emerging Markets Index.

Maintaining EM Status

In other words, finding a non-leveraged, single-country exchange-traded fund that is outpacing EPU this year is not easy work. All that for a country that, just 10 months ago, was on the brink of losing its emerging markets status. Last year, MSCI, the index provider for an array of widely followed global benchmarks including the MSCI Emerging Markets Index, said it was mulling a demotion of Peru to frontier market status.

Rebounding Peruvian equities have helped the country retain its emerging status, but that does not mean the current environment is perfectly sanguine for EPU and Peruvian stocks.

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President-elect Pedro Pablo Kuczynski must manage growth-supporting fiscal stimulus without overspending and endangering Peru's sovereign credit rating.

“Kuczynski's party indicated it will rely on fiscal stimulus to offset the negative impact of decreased copper prices through a ramp-up of public investment and adjustments to the tax regime to favor small-business formalization and private investment. Rising copper production and increased public investment aim to achieve growth of 3.5 percent in 2016 and 4.0 percent in 2017. While Peru's growth averaged 5.8 percent from 2011 to 2015, we expect the economy will continue to outperform the 'BBB' median, with 2.4 percent and 2.9 percent growth in 2016 and 2017, respectively,” said Fitch Ratings in a recent note. 

Bragging On Peru

In addition to being one of the world's largest silver producers, Peru is also a major copper producer. EPU reflects the Peruvian economy's dependence on the mining industry as materials stocks account for nearly 47 percent of the ETF's weight. Financial services names are another 30.5 percent.

Kuczynski is not stepping into the mess that his counterparts in, say, Brazil or Venezuela are dealing with. Peru's economy had a compounded annual rate of growth of 4.7 percent over the past seven years, according to the Wall Street Journal.

The World Bank recently boosted its 2016 GDP estimate for Peruvian growth to 3.5 percent from 3.3 percent.

“Sustaining Peru's growth trajectory will depend upon the success of initiatives that include improving the country's transit, energy and logistics infrastructure while raising the productivity of alternative sectors such as tourism and agriculture. It will also depend on creating conditions that will move labor formalization forward and broaden the tax base. Moreover, an improvement in credibly managing and resolving social conflicts in mining investments would be critical to the recovery of the country's competitive mining sector,” added Fitch.