Peru: Latin America’s success story

Improved political stability, the commodities boom and sound management have made Peru very attractive to investors.

Brazil's continual political turmoil dominates coverage of Latin America. But the furore deflects attention from success stories elsewhere on the continent. One is Peru: "a sound, fundamental story with improved political prospects and a lot of momentum behind it", says JPMorgan's Franco Uccelli.

In the past decade, growth has averaged 5.9% a year. ne reason is improved political stability, with democracy becoming entrenched in the 2000s, fuelling confidence among foreign investors. The commodities boom has been a key tailwind: gold and copper exports account for 40% of total shipments.

But sound management has helped too, with ongoing restraint on the public-spending front lowering the public-debt-to-GDP ratio to 23% from almost 40% in 2006 allowing scope for higher investment, says business-friendly, centre-right former investment banker, Pedro Pablo Kuczynski, has just won the presidency, and hopes to lower taxes and red tape in a bid to entice entrepreneurs into the formal economy: the shadow economy remains large compared with other economies in the region.

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The longer-term backdrop is encouraging; the immediate outlook looks good too. Rising copper production should bolster growth; foreign investment facilitated the opening of two new mines this year. Inflation has cooled following a series of interest-rate hikes, so the central bank should now be able to bolster growth with easier money. The new government plans to beef up infrastructure spending and lower the sales tax to encourage consumption.

The government has eased its fiscal deficit rules and will now allow itself an annual overspend of 2.5% in 2017, still a far cry from Western levels. Capital Economics expects growth of 4% in 2016. Given all this, it's no wonder analysts have been calling for investors to stock up on the country's bonds. There is also a US-listed ETF, the iShares MSCI All Peru capped (NYSE: EPU), that investors with a healthy risk appetite may wish to research.

Avoid Mexico for now

The key worry is Donald Trump, who has promised to make Mexico's life very difficult if elected. He plans to force America's southern neighbour to pay for a wall to prevent illegal immigration, and also wants to put tariffs on Mexican exports, which threatens to undermine the North Atlantic Free Trade Agreement (Nafta).

Meanwhile, Mexican growth has been tempered by the pedestrian performance of the US economy and the collapse of oil prices, which negated the benefits of opening the sector up to competition. The central bank has also had to raise interest rates to shore up the currency.

Furthermore, the MSCI Mexico index is on a forward price-earnings ratio of 23. The consumer-spending sector is looking robust, but the main play here, Walmart de Mexico, is especially expensive. Steer clear of Mexico for now.