2016’s Emerging Market Surprise: Peru Breaks Out, Performs Strong at Nearly 40%

A slowdown in China and other global economic turmoil were thought to spell trouble for Latin America in 2016, but as of May, most Latin American stock indices are actually outperforming the S&P, with Peru coming in at close to 40%.

Peruvian stock indices have typically followed the returns of the DJ-UBS US Copper Index; however, in the past 6 months, the MSCI Peru equity index has broken out against this historical pattern. This shift of equity markets away from the alignment with copper is interesting, and not something we have seen for some time.

We analyzed eight managers from the Morningstar’s Latin American stock category to measure the effect Peru has had on their performance. Asset Loadings chart below presents results of such analysis showing fund’s average exposures to five Latin American equity markets over time. Using Returns Based Style Analysis (RBSA), we were able to quickly uncover apparent 50% decrease in exposure to Peruvian equity in funds since the beginning of 2016. And while RBSA exposures do not represent the actual true holdings composition of the portfolios (which can be unknown, especially for recent periods), it does give us some understanding of what could be driving a portfolio, and of recent changes in manager strategy and behavior.

When compared to equity indices representing the largest Latin American markets¹, we see that Peru is generally the third largest exposure of these managers after Brazil and Mexico, over the last two years, despite being the 5^th largest economy in Latin America. Our analysis above shows that in recent months funds’ exposures to Peru and Chile shifted significantly and are now more in line with the MSCI Latin American index.

Hindsight is 20/20, and managers surely had a right to be skeptical about Peru. Apart from the China slowdown and an overall increase in risk, Peru suffered declining performance in 2015, coming in ahead of only Brazil in the region. (And Brazil, by virtue of its market dominance, is far less likely a candidate for a sell-off than Peru is.) Perhaps some managers in this investment category gave up too quickly on Peru, and missed out on its recent outperformance?

Many studies have documented the link between Peru and the commodities market. It was a logical conclusion for managers to shift away from this economy based on the continued slowdown in China and commodities. Still, Peru’s strong economic performance this year has surprised many people in the market, including (based on our research) managers specializing in Latin American stock. Even without the slowdown of China, posting more than a 40% return in an equity index over a six-month period is rare. More research is required to fully understand the reasons behind this performance and what the future holds for Peru.

DISCLAIMER: MPI conducts returns-based analyses and, beyond any public information, does not claim to know or imply what the actual strategy, positions or holdings of the funds discussed are, nor are we commenting on the quality or merits of the actual investment strategies. This analysis is purely returns-based and does not reflect insights into actual holdings. Deviations between our analysis and the actual holdings and/or management decisions made by funds are expected and inherent in any quantitative risk factor analysis. MPI makes no warranties or guarantees as to the accuracy of this statistical analysis, nor does it take any responsibility for investment decisions made by any parties based on this analysis.

Footnotes

• 1Brazil, Mexico, Argentina, Peru, Colombia and Chile