Despite Bullish Break In IGBVL, Fundamentals Advise Medium-Term Caution

BMI View: Despite favourable technical signals which may portend further near-term gains for Peru's IGBVL benchmark equity index, we remain cautious regarding the medium-term outlook for the bourse, given our dim outlook for the price of both base and precious metals. Nevertheless, we reiterate that opportunities still exist for selective investors, particularly in defensive stocks such as utilities and consumer staples.

Peru's IGBVL benchmark equity index may be poised for limited near-term gains, but we remain cautious with regard to the index over the longer term, given the poor fundamental dynamics affecting the mining sector, which comprises over half of the bourse. This dim outlook is based on global dynamics which expected to adversely affect the price of key Peruvian exports, including the slowdown and rebalancing of the Chinese economy, as well as the normalisation of monetary policy in the US.

In line with our expectations, over most of the past several weeks the IGBVL index has fallen, with the overall market falling 9.6% between our last update on November 8 and recent lows of 14,650 on December 6. Over the past week, however, the bourse has bounced off technical support and broken through resistance, signalling possible further near-term gains. Furthermore, valuations for key mining firms still look cheap on a historical basis.

Bullish Break Suggests Near-Term Gains, But Medium Term Outlook Still Dim
Peru - IGBVL Index

BMI View: Despite favourable technical signals which may portend further near-term gains for Peru's IGBVL benchmark equity index, we remain cautious regarding the medium-term outlook for the bourse, given our dim outlook for the price of both base and precious metals. Nevertheless, we reiterate that opportunities still exist for selective investors, particularly in defensive stocks such as utilities and consumer staples.

Peru's IGBVL benchmark equity index may be poised for limited near-term gains, but we remain cautious with regard to the index over the longer term, given the poor fundamental dynamics affecting the mining sector, which comprises over half of the bourse. This dim outlook is based on global dynamics which expected to adversely affect the price of key Peruvian exports, including the slowdown and rebalancing of the Chinese economy, as well as the normalisation of monetary policy in the US.

In line with our expectations, over most of the past several weeks the IGBVL index has fallen, with the overall market falling 9.6% between our last update on November 8 and recent lows of 14,650 on December 6. Over the past week, however, the bourse has bounced off technical support and broken through resistance, signalling possible further near-term gains. Furthermore, valuations for key mining firms still look cheap on a historical basis.

Bullish Break Suggests Near-Term Gains, But Medium Term Outlook Still Dim
Peru - IGBVL Index

Nevertheless, we do not anticipate a sustained recovery in Peruvian stocks, due in large part to the fact that profits for mining companies, which comprise 56% of the benchmark index by weight, are likely to continue to be squeezed over the medium term. The price of copper has seen a very modest bounce in recent weeks (which may help to explain the recent improvement in investor sentiment towards Peru), but is now approaching technical resistance at around US$7,250 per tonne. As China, the world's leading consumer of copper, continues to grapple with below-trend growth and a rebalancing away from its investment-led economic model, our Commodities team is forecasting the price of copper to average US$6,800/tonne in 2014. This suggests that the recent rebound is likely to be short-lived, with negative implications for copper miners.

Copper Bounce To Be Short-Lived
Three-Month LME Copper, US$/tonne

Meanwhile, precious metals remain under pressure, a dynamic we believe will only intensify as the US Federal Reserve begins to taper its asset purchases over the course of 2014, signalling the beginning of the end for its extremely easy monetary policy. As returns on other assets rise, we expect investors to continue to reduce their holdings of defensive assets such as precious metals, pushing down prices. As a top producer of both silver and gold, Peru will be hit hard by these declines.

Precious Metals Downtrend To Persist Into 2014
Price Of Gold & Silver, US$/Oz

Other Sectors To Outperform

Despite the headwinds facing the Peruvian economy, we reiterate our view that selective investors may still find promising opportunities. We have highlighted that stocks with low exposure to metals, and we reiterate that utilities and consumer staples are both likely to outperform the benchmark over the coming quarters.

On a tactical basis, we highlighted in our last update that Alicorp, a consumer staples firm, looked particularly promising given that it was testing multi-year technical support ( see 'Global Headwinds To Continue Dragging On IGBVL', November 8 2013). This view has played out, with the stock climbing by 5.2% since November 10, versus a decline of 6.4% for the index as a whole. Indeed, Alicorp was one of the top three performers over the period by weight, adding 15.6 points to the overall index. From a technical perspective, the stock looks overbought according to the relative strength index, suggesting that further gains over the near term are likely to be limited, however we remain optimistic on the broader consumer staples sector relative to the benchmark.

Bullish Alicorp View Playing Out
Peru - Alicorp Share Price, PEN

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