Feeling adventurous? You should invest in Peru

After shedding a violent and debt-ridden past, Peru has been enjoying a decade of rapid economic growth and stable government. That's opened up plenty of opportunities for investors, says James McKeigue. Here's how you can take advantage.

Buy Peru' is probably not the top item on most British investors' to do' lists.

Like much of the rest of Latin America, it's had a pretty rough ride in recent times.

The 80s saw a surge in external debt, inflation, drug trafficking and violence.

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In the 90s, controversial President Alberto Fujimori ended the violence and got the economy back on track. However, he's since been sent to jail for his part in directing death squads against left-wing guerrillas.

Like I said, a pretty rough ride.

But it'd be a mistake to neglect the country. Because things have got better for Peru over the last ten years.

And that's led to a major investment opportunity opening up which you can take advantage of right now

Why Peru is planning a road-building spree

Since 2000, a succession of pro-business, fiscally-responsible governments have helped drive Peru forward. Since 2003, the economy has grown at an average rate of 6.6% per year.

That's not unusual of course. A lot of emerging markets have enjoyed growth in the past decade. But what's encouraging about Peru is that it used the good times to pay down its debts. The national debt has fallen to 22% of GDP, from almost 50% in 2003.

The stats confirm the anecdotal evidence I've heard from businessmen and investors. The CEO of one Western oil firm active across the region told me - off the record, admittedly - that Peru has the best business environment in Latin America. "They get business and they want to get deals done."

Last summer, investors wavered. It looked like things might be about to change again, this time for the worse, when left-wing President Ollanta Humala was voted in. The US-listed Peru exchange-traded fund (ETF) a pretty good indicator of international sentiment fell as investors braced themselves for the new regime.

Yet one year on, it's clear that Humala is keen to attract more international business. As Mark Wainwright notes in the Infrastructure Journal: "President Humala appears to have decided that his stated goal of giving Peru's poor a greater share of their country's mineral wealth can best be achieved through, rather than at the expense of, the free market."

How will he do this? By spending $20.5bn on improving infrastructure over the next five years. Like much of South America, Peru is dominated by the Andes mountain range. For years, its challenging geography has hindered trade and travel within the country.

This problem has been made worse by the country's rapid growth, which has put more strain on the existing infrastructure. In fact, a World Economic Forum study shows that Peru has the second-biggest infrastructure gap' in the region (just behind Bolivia).

In other words, it has a lot of upgrading and construction to do to get its infrastructure up to scratch. The report highlights "significant opportunities" in the transport and electricity transmission systems, in particular.

The government wants to change all this with an extensive range of road, rail and air links. So $11bn will go towards improving transport routes across the jungle and mountain regions. That will involve building 7,000km of new road and paving 85% of the existing roads, so that they can withstand seasonal weather changes.

A further $8.3bn will be spent on railways linking towns in the mountains to ports on the country's Pacific coast, and on a new commuter line in the capital, Lima. There will also be money for new airports, telecommunications systems and river management.

How to invest in Peruvian infrastructure

Now, most of Peru's exports are commodities. And as we've already noted, commodity prices could be in trouble as China slows down. However, while a Chinese hard landing wouldn't be ideal for Peru, the aforementioned infrastructure gap' means that its projects are likely to go ahead regardless these aren't vanity projects.

It also helps that Peru has a great track record of getting the private sector to build infrastructure. After various experiments with privatisation, it hit upon the current model in 2005.

Firms bid to build and operate a project. They get a guarantee from the government that it will compensate them if revenues don't hit a certain target. Moreover, firms can split some contracts up into sections, then issue bonds to fund each phase, allowing them to attract extra funding.

It's been a massive success. Since 2006, pending private investment in Peruvian infrastructure is up 300%, hitting $7bn last year.

So how can investors benefit from this Peruvian infrastructure boom? Unfortunately there are no funds out there that offer enough exposure to fit the bill. BNY Mellon has a Latin America Infrastructure fund, but it is skewed towards Brazil. There are Peru-focused ETFs, but these have a heavy emphasis on energy and finance.

However, if you're willing to take the risk of investing in a single stock, there is small US-listed company that should provide good exposure to the infrastructure boom.

Cementos Pacasmayo (NYSE: CPAC) is a leading Peruvian cement company and one of the few Peruvian firms with a full listing on the NYSE. It is based in the less developed north of the country, where it has a virtual monopoly.

Cement demand in the region is expected to grow at 8% per year and Pacasmayo is building new facilities that will boost capacity 45% by 2015. The firm is also in good financial shape with a healthy balance sheet. The firm's profitable business chucks out plenty of cash - JP Morgan reckons about $80m this year. That means it will be able to fund the new plants without taking on too much debt.

At the moment it trades on a forward price/earnings (p/e) ratio of 16.7. That may look pricey, but JP Morgan expects it to fall as profits increase. And Pacasmayo's attractive operating profit margin is "one reason why the company deserves a higher multiple than other cement companies in the world", says JP Morgan analyst Adrian E Huerta. The company currently trades at around $12.50 per share - JP Morgan has a target price of $15.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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James graduated from Keele University with a BA (Hons) in English literature and history, and has a NCTJ certificate in journalism.


After working as a freelance journalist in various Latin American countries, and a spell at ITV, James wrote for Television Business International and covered the European equity markets for the Forbes.com London bureau. 


James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. 


He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.