American investors don’t have to go far to find off the radar screen developing market opportunities; some are in their own backyard. One of these is the MILA (Mercado Integrado Latinoamericano), a Latin American stock exchange commonly referred to as the Andean Exchange. Formed in 2011 by Chile, Colombia and Peru, the Andean Exchange integrates the stock markets of Colombia (Colombia Stock Exchange), Chile (Santiago Stock Exchange) and Peru (Lima Stock Exchange).
Prior to the creation of the Andean Exchange, Latin American bourses were largely ignored (except for Brazil, of course); outside of Sao Paolo and Mexico City, Latin markets had few companies known internationally, except for the few large copper and oil producers. Now investors interested in the opportunities to be had in the developing markets of Latin America have an alternative to Brazil.
The Andean Exchange has quickly become the largest trading venue in Latin America. By number of issuers (544), it is ahead of Mexico's Bolsa Mexicana de Valores (427) and Brazil's Bovespa (381). It is second by market capitalization (U.S. $ 727 billion, behind Brazil's $ 1.23 trillion, but ahead of Mexico's $ 525 billion), and the third by turnover (behind Brazil and Mexico).
The Andean Exchange countries have long been known for their free-trade and open-market policies. Each enthusiastically pushed to sign free trade agreements with the United States (Chile in 2003, Peru in 2006 and Colombia in 2011) which bolstered bi-lateral trade. The Exchange is designed to increase investment and trade amongst these countries’ combined 95 million citizens.
As Chilean Foreign Minister Alfredo Moreno told investors in a June 2013 MILA road show in New York, "We're very open to the world, but we do not trade much among ourselves.” While intra-regional trade in Europe represents 71% of the EU's GDP, it represents only 29% of GDP in South America, Central America and the Caribbean; the Andean Exchange is designed to increase that percentage.
Another of the Exchange's goals is to diversify the constituent economies away from their historic metals and energy exports. Chile is the world's leading copper producer; exporting one-third of the world's copper, with much of it destined for China and the ASEAN countries. Peru, the world's third-largest copper and zinc producer, has joint-venture mining operations with Chinese companies, and both countries have long-held commercial relations with America and the EU.
When China's 2013 demand for metals caused a price and volume collapse, Chile's 2013 export revenue dropped 30% from 2012 levels and Peru's (which also exports energy, coffee and gold) revenue dropped 25.7%. The Andean Exchange is working to simplify intra-regional stock ownership and investment by reducing regulatory and tax issues as a means of increasing trade and investment throughout Latin America.
American investors are able to participate in the Andean Exchange through two ETFs based on the S&P Mila 40 Index (SPMILA). Introduced in 2011, the SPMILA tracks the 40 largest and most liquid companies in the Chilean, Colombian and Peruvian markets. Although the SPMILA is down 7.76% year to date due to a combination of issues—difficulties in some developing markets and the slowdown in China, primarily—it's up 3.68% month to date as investors slowly step away from a broad-brush categorization of “emerging” markets and begin to evaluate developing markets on a country by country—or regional, in this case—basis.
The first ETF to focus on the Andean region is the Global X FTSE Andean 40 ETF (AND). Introduced in February 2011, the Andean 40 is based on the S&P MILA 40 Index. While the Andean 40 ETF is down 22.9 % year to date, it’s down only 4.09% for two years. Financials (27.29%) lead the list of the Andean 40’s holdings, followed by materials (17.61%) and energy (16.97%).
The Horizons MILA 40 ETF is tailored to the Latin American investor. The Horizons MILA 40 ETF (Fondo Bursátil Horizons MILA 40 de S&P (HMILA40) was created in October 2013 when S&P Dow Jones Indices licensed the S&P MILA 40 Index to the Horizons ETF Group for its creation. The HMILA40, to be listed on the Bolsa de Valores de Colombia (BVC), will be the first Andean equity-focused ETF available in Colombia. Despite its initial bland returns, the Andean Exchange has the potential to deliver China-like growth in the near future.
The Mexican Stock Exchange is joining the MILA and its full incorporation is expected this year. The Mexican Exchange took the extra step of acquiring 3.79 million shares of the Lima Stock Exchange (6.7% of the Series A shares), which will enable Mexican investors to more easily participate in strategic partnerships and joint business activities in Peru, and, with the link provided by the Andean Exchange, in Colombia and Chile as well.
Latin America's financial services companies are already expanding in support of Andean Exchange business. Brazil's BTG Pactual purchased a Chilean brokerage with operations in Colombia and Peru, and Chilean financial houses LarrainVial SA, Corpbanca SA and Banco de Credito e Inversiones SA have all moved into Peru and Colombia.
With the addition of the Mexican Stock Exchange later this year, the Andean Exchange is poised to become the largest exchange and market in Latin America; trumping Brazil's Bovespa's $ 1.23 trillion market cap, 381 issuers and population of 199.3 million with its $ 1.25 trillion market cap, 971 issuers and 213.3 million population. An investment opportunity of this magnitude is what draws the smart set. Consider that France's BNP Paribas expects by August to have a fiduciary trust company running in Bogota to tap into the MILA market.
Perhaps the long-sought gold of Eldorado will at last be found in the Andean Exchange.