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)|