Equity Strategy: Strong Fundamental Case Remains

We are turning increasingly constructive towards Colombian equities due to strengthening fundamentals across several sectors. However, uncertainty regarding the performance of energy sector stocks, which make up 30% of the IGBC index, prompts us to remain on the sidelines for now. We therefore continue to focus our equity strategy towards sectors that we think are well positioned to outperform the benchmark index, such as infrastructure and consumer stocks. Since our last equity strategy update in November, we took profit on our bullish Colombian materials view in our Macro-Industry Strategy due to a deteriorating technical picture, with implied gains of 19.0% since initiation on July 2 ( see 'Taking Profit On Bullish Colombian Materials View', November 12). That said, we continue to like the sector's fundamentals and would consider re-entering our bullish view if the technicals turn attractive again. In addition, we have long highlighted the growth potential of the Colombian consumer ( see 'Consumer Well Positioned For Multi-Year Acceleration', July 18) and are therefore exploring plays through major retailers.

Question Marks Remain For Energy Sector

While our Oil & Gas team maintains a favourable outlook towards Colombia, we believe several factors could continue to sustain downbeat market sentiment towards the country's main energy players, namely majority state-owned Ecopetrol and Canadian-based Pacific Rubiales. First, the security environment remains uncertain amid a rising number of attacks to energy sector assets by the country's main left-wing insurgent groups. Despite the ongoing peace negotiations between the government and the largest insurgent group, the Fuerzas Armadas Revolucionarias de Colombia (Farc), attacks have increased by over 15.0% this year. Second, Colombia's long-term oil production trajectory remains uncertain given a lack of significant resource discoveries in recent years, which has seen Ecopetrol's reserve's replacement ratio fall from 165% in 2011 to 109% this year ( see 'Ecopetrol Plans Could Further Lift Output, But Caution Remains', November 20). That said, following a sharp sell-off throughout 2013, the technical picture on energy stocks is beginning to look attractive, and we would consider initiating a bullish position upon signs that the security environment and company fundamentals are improving.

Approaching Attractive Levels
Colombia - IGBC Benchmark Equity Index (Weekly)

We are turning increasingly constructive towards Colombian equities due to strengthening fundamentals across several sectors. However, uncertainty regarding the performance of energy sector stocks, which make up 30% of the IGBC index, prompts us to remain on the sidelines for now. We therefore continue to focus our equity strategy towards sectors that we think are well positioned to outperform the benchmark index, such as infrastructure and consumer stocks. Since our last equity strategy update in November, we took profit on our bullish Colombian materials view in our Macro-Industry Strategy due to a deteriorating technical picture, with implied gains of 19.0% since initiation on July 2 ( see 'Taking Profit On Bullish Colombian Materials View', November 12). That said, we continue to like the sector's fundamentals and would consider re-entering our bullish view if the technicals turn attractive again. In addition, we have long highlighted the growth potential of the Colombian consumer ( see 'Consumer Well Positioned For Multi-Year Acceleration', July 18) and are therefore exploring plays through major retailers.

Approaching Attractive Levels
Colombia - IGBC Benchmark Equity Index (Weekly)

Question Marks Remain For Energy Sector

While our Oil & Gas team maintains a favourable outlook towards Colombia, we believe several factors could continue to sustain downbeat market sentiment towards the country's main energy players, namely majority state-owned Ecopetrol and Canadian-based Pacific Rubiales. First, the security environment remains uncertain amid a rising number of attacks to energy sector assets by the country's main left-wing insurgent groups. Despite the ongoing peace negotiations between the government and the largest insurgent group, the Fuerzas Armadas Revolucionarias de Colombia (Farc), attacks have increased by over 15.0% this year. Second, Colombia's long-term oil production trajectory remains uncertain given a lack of significant resource discoveries in recent years, which has seen Ecopetrol's reserve's replacement ratio fall from 165% in 2011 to 109% this year ( see 'Ecopetrol Plans Could Further Lift Output, But Caution Remains', November 20). That said, following a sharp sell-off throughout 2013, the technical picture on energy stocks is beginning to look attractive, and we would consider initiating a bullish position upon signs that the security environment and company fundamentals are improving.

Risk/Reward Beginning To Look Appealing
Colombia - Ecopetrol Share Price, COP (Weekly)

End Of Household Deleveraging Opens Up Opportunities In The Retail Sector

We believe that a two year-long household deleveraging cycle in Colombia is approaching its final months ( see 'Household Deleveraging Cycle Approaching An Inflection Point', November 8), which bodes well for the domestic retail sector. We have been monitoring one the country' largest retailers Almacenes Exito for some time now as a potential way of expressing our favourable outlook towards the consumer in our Macro-Industry Strategy. However, Exito's share price has recently broken multi-year trendline support around COP30,500, which we believe is partly a result of the increasingly competitive landscape of Colombia's retail sector. Indeed, companies such as Chilean-based Cencosud have recently entered the Colombian market, and others will likely follow, placing pressure on the market share of well-established domestic retailers such as Exito. However, as things stand, we believe Exito will remain a dominant company in this sector, and are therefore monitoring the technical picture closely to assess when the re-pricing of the new reality of higher competition has mostly run its course, in order to identify a potential entry point to a bullish Colombian consumer view.

Waiting For Technical Picture To Improve
Colombia - Exito Share Price, COP (Weekly)

More Upside For Infrastructure In The Months Ahead

Our recent decision to take profit on our bullish Colombian Materials Macro-Industry view, expressed through Cementos Argos (Cemargos), was based on a changing technical picture, rater than a shift in the fundamentals. We continue to like the long-term fundamentals of the construction materials sector due to the strong infrastructure project pipeline. Indeed, our Infrastructure team recently revised up their 2014 construction sector growth forecast from 5.1% to 7.4%, with a particularly strong performance expected by the transport sub-sector ( see 'Upward Revision Underscores Much Brighter Outlook', November 22). Cemargos reported robust 5% and 14% increases in sales of cement and concrete respectively in Q313, compared with the same period in 2012, and we therefore believe the company's share price will begin to look attractive again once the technical picture improves. We identify a sustained bounce above support around COP9,000 as a potential indication that sentiment towards Cemargos is turning positive once more.

Still Like The Sectors' Fundamentals
Colombia - Cemargos Share Price, COP (Weekly)

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Sector: Country Risk
Geography: Colombia
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