It tracks what is South America's fastest-growing major
economy and is coming off a year in which it left the iShares
MSCI Brazil Index Fund (NYSE:
) and the iShares Chile Investable Market Index Fund (NYSE:
) in the dust, but for some reason it still feels as though the
iShares MSCI All Peru Capped Index Fund (NYSE:
) is not getting much attention.
That should not be the case. Not with EPU touching a new
52-week high on Thursday. Flirting with $48 means EPU is within
shouting distance of its all-time high just over $50 set in
While 2013 is still young, noteworthy is the fact that EPU is
showing no signs of a hangover from last year's ebullience. The
ETF is up 2.64 percent to start the new year. That may not sound
like much, but that gain has been accrued in less than 12 full
trading days. Not to mention, the comparable
EPU has outpaced this year reads like a "who's who" of Latin
The list of Latin American ETFs trailing EPU includes: ECH,
EWZ, the iShares MSCI Mexico Investable Market Index Fund (NYSE:
), itself a 2012 star performer; the iShares S&P Latin
America 40 Index Fund (NYSE:
) and the SPDR S&P Emerging Latin America ETF (NYSE:
Investors that are already familiar with EPU are no doubt
unsurprised by the ETF's continued bullishness. What may be
surprising to some is that
there is more to the story than just raw
Earlier this week, Peru reported December GDP growth of 6.83
percent, up from 6.71 percent in November. That easily topped the
6.2 percent analysts expected. Many analysts and banks are
forecasting Peruvian GDP growth of six percent this year, but
even the World Bank's forecast of 5.8 percent looks good,
If the World Bank estimates are accurate,
Argentina, Brazil, Chile, Colombia and Mexico
will offer GDP growth rates that lag Peru by significant
The December GDP report and the World Bank estimate were
released this week, though it feels like hardly anyone noticed.
Again, that is arguably surprising because EPU, at various points
during its trading history,
has shown a tendency to be somewhat sensitive to
As was noted earlier, Peru is viewed as a materials play
because the country is one of the world's largest producers of
copper, gold and silver. While Chile is the world's largest
copper producer, ECH is not excessively weighted to materials
stocks. The opposite is true with EPU, which allocates 50.4
percent of its weight to materials names.
Clearly, there is no getting around the fact that metals
demand is an important factor in forecasting EPU's expected
returns. So is the under-appreciated Peruvian banking sector,
which represents 27.4 percnet of EPU's weight. On that note, it
is important to realize that Credicorp is EPU's largest holding
at a weight of 21.3 percent.
Exposure to Peruvian banks is an idea worth exploring. Lending
probably rose 18 percent last year
, a rate that some policymakers there view as sustainable in the
Another point to consider: An acceptable non-performing loan
ratio for a bank is in the area of five percent. Peruvian banks
had an average NPL ratio of
1.79 percent at the end of November
Importantly, Peru's central bank has raised bank reserve
requirements five times in the past 10 months as a means of
stemming inflation and avoiding a possible credit bubble.
Increased reserve requirements appear to be the central bank's
preferred tool for fighting those issues. Peru's benchmark
interest rate stands at 4.25 percent, tied with Colombia for the
lowest interest rates among Latin America's major economies.
On top of all this, EPU is attractively valued. The ETF's
P/E ratio of 15.33
is lower than that of EWZ, ECH, EWW and the iShares MSCI Emerging
Markets Index Fund (NYSE:
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