Equity Strategy: Bullish Materials, Assessing Energy Sector Recovery

We have turned more constructive towards Colombia's IGBC benchmark equity index, as sentiment towards several sectors, as well as their underlying fundamentals, are showing early signs of a recovery following a poor performance in H113. However, f or the time being, we prefer to maintain our neutral stance on the IGBC and play the ongoing bounce in Colombian equities through specific sectors that are set to outperform the index. In our previous Colombia Equity Strategy ( see 'Monitoring Post-Sell-Off Opportunities', June 14 ) we identified the materials and energy sectors as potential outperformers. Since then , we have initiated a bullish position on materials company Cemargos in our Americas Asset Class Strategy Table ( see 'Bullish Colombian Materials', July 2 ), and are considering turning bullish on energy stocks upon confirmation that the sector's fundamentals are improving.

Materials Will Continue To See Gains As Infra Outlook Improves

While o u r bullish position on Cemargos has alre a dy delivered 10.9% of implied gains since initiation on July 2, nearly reaching our initial share price target of COP9,000 (currently trading at COP8,850), we still see further upside potential. We are now targeting COP9,500, as improvi ng fundamentals will likely sustain investor optimism over the coming weeks at least . Indeed, we expect a strong H213 and 201 4 infrastructure-related project pipeline, in which Cemargos, with nearly a 50.0% market share in the cement sector , is well positioned to reap the benefits ( see 'Cemargos Emerges As An Outperformer To Watch', July 10 ) . The expected improvement in the infrastructure sector will be driven by a government stim ulus programme, which will provide US$390mn to accelerate the completion of ongoing projects, which should offset some of the tendering delays seen in recent months. While we maintain a strong positive conviction towards the sector's fundamentals, we are moving up our stop-loss level from COP7,750 to COP8,450, in order to secure at least 5.9% in implied gains , in the event of a reversal in market sentiment.

Opting To Play Bounce Through Sector Selectivity
Colombia - IGBC Benchmark Equity Index (weekly)

Equity Strategy: Bullish Materials, Assessing Energy Sector Recovery

We have turned more constructive towards Colombia's IGBC benchmark equity index, as sentiment towards several sectors, as well as their underlying fundamentals, are showing early signs of a recovery following a poor performance in H113. However, f or the time being, we prefer to maintain our neutral stance on the IGBC and play the ongoing bounce in Colombian equities through specific sectors that are set to outperform the index. In our previous Colombia Equity Strategy ( see 'Monitoring Post-Sell-Off Opportunities', June 14 ) we identified the materials and energy sectors as potential outperformers. Since then , we have initiated a bullish position on materials company Cemargos in our Americas Asset Class Strategy Table ( see 'Bullish Colombian Materials', July 2 ), and are considering turning bullish on energy stocks upon confirmation that the sector's fundamentals are improving.

Opting To Play Bounce Through Sector Selectivity
Colombia - IGBC Benchmark Equity Index (weekly)

Materials Will Continue To See Gains As Infra Outlook Improves

While o u r bullish position on Cemargos has alre a dy delivered 10.9% of implied gains since initiation on July 2, nearly reaching our initial share price target of COP9,000 (currently trading at COP8,850), we still see further upside potential. We are now targeting COP9,500, as improvi ng fundamentals will likely sustain investor optimism over the coming weeks at least . Indeed, we expect a strong H213 and 201 4 infrastructure-related project pipeline, in which Cemargos, with nearly a 50.0% market share in the cement sector , is well positioned to reap the benefits ( see 'Cemargos Emerges As An Outperformer To Watch', July 10 ) . The expected improvement in the infrastructure sector will be driven by a government stim ulus programme, which will provide US$390mn to accelerate the completion of ongoing projects, which should offset some of the tendering delays seen in recent months. While we maintain a strong positive conviction towards the sector's fundamentals, we are moving up our stop-loss level from COP7,750 to COP8,450, in order to secure at least 5.9% in implied gains , in the event of a reversal in market sentiment.

Next Target 9,500
Colombia - Cemargos Share Price, COP (weekly)

Seeking Confirmation Of Improving Fundamentals In Energy Sector

For the last couple of months we have been monitoring a potential bounce in Colombian energy stocks ( see , ' Is Ecopetrol Ready To Rally Again?', May 28 ), and there are signs that suggest that this could be in its early stages . Indeed, following nearly a 30.0% sell-off since late 2012 for both Ecopetrol and Pacific Rubiales , the major energy companies operating in the country, since early-July the share price of both companie s has bounced strongly off of key multi-year support levels , suggesting a potential trend reversal . We are now awaiting confirmati on that some of our concerns towards the sector fundamentals have been addressed, particularly a delay in government licensing processes and slipping production growth. A recent press release by Pacific Rubiales presented early indications that its company fundamentals are improving, which underpins our preference for Pacific Rubiales over Ecopetrol for the time being ( see, 'Pacific Rubiales Well Positioned To Light Up', July 12 ). However, Q213 earnings for both companies, which are scheduled to be released early August, will be key to assess if the recent improvements are translating into stronger financials. Therefore, were we to see robust Q 213 earnings, we would consider initiating a bullish position on either of the country's energy majors, or on the MSCI Colombia E nergy Index, which also looks attractive from a technical perspective.

Strong Upside If Sentiment And Fundamentals Align
MSCI Colombia Energy Index (weekly)
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