Colombian Update July 2nd : Whats New (s) : Half Term Report, Central Bank, Cement, Justice.

TRUDEAULANDIA

By the time this arrives on your desk I will have departed Colombia for a brief sojourn to Canada, an anticipated journey because whilst I have been a few times it has always been for punctual events such as the Formula 1 in Montreal awash with petrol-heads or worse still amidst the 1000s of hairy geologists looking at core samples at PDAC in Toronto, this time I aim to get a little more off-track, anyway the good (?) news is that the wonders of technology mean I can keep in touch with events further south. HALF TERM REPORT So half of 2019 has already passed us by and for Colombian capital markets it has been something of a rocky ride. Events both internally, namely the Presidential election, and externally in the guise of Donald Trump have kept investors guessing - now with the elections in the rear view mirror and the economy moving along nicely it will only be external events that will slow,the advance of the markets. The COLCAP has touched the highs of 1600 already in 2018 however it also touched 1450 at one point and finally closed the semester at 1577, a rise of 4.19% in local terms which vis a vis other Latam markets such as Chile (-4.73%), Peru (-0.87%) & Brazil (-4.76%) is not too shabby although if we zoom out we find that Colombia under-performed in 2017. If however we double-click on that COLCAP number we find that it is a somewhat deceptive picture. Firstly of the 25 names within the index only 8 were in positive territory over the first six months and only four of them significantly so. Secondly if we look at the 4.19% increase YTD in the index that represents a total of 63.36 points we find that Ecopetrol with its 38.9% price increase actually contributed 64 points of increase - add to that the 57 points added by the two lines of Bancolombia stock and you have a distorted picture. To the downside amidst the 15 names below the waterline we find that the biggest contributor to the downside was Cementos Argos Ords which contributed 9.5 points as it fell 14.02%. This is the deceptive picture for the COLCAP, the picture is simply not as rosy as it appears at first blush, the gloss being added by the oil price which has boosted Ecopetrol well out of proportion of the results it will likely register in 2018 and the banks which have understandably risen in line with an improving economy, aside from that it makes for dismal reading especially taking into account the lackluster 2017. Moving to the currency market the Peso has also been a benefactor of the oil price and at one point touched down at 2682 although in large part due to Trumpanomics that rate has now risen to 2930, that still represents a valuation of 1.89% YTD and has an impact for foreigners as it adds somewhat to their YTD returns.

The bond market has experienced a similar six months - the 2024 benchmark closed on Friday at 6.15% having started the year at 6.09%, that said it has been a bumpy ride as we have touched both 6.56% & 5.85% along the way. Whilst it hasn't been a great semester the elections are now behind us and unquestionably there are causes for optimism - the economy may not be booming but an expansion is coming and we have already seen some banks moving upwards accordingly and there are several names, Cementos Argos, Exito & Avianca spring to mind, that have had a very conservative 2018 thus far but as construction picks up and the consumer starts to do more of what they do best then other names will join the banks above the waterline. Again external events are the danger, the trade war or a slump in oil prices could have a serious impact on Colombia's performance but fingers crossed the COLCAP will be left free to make some decent progress.

CENTRAL BANK

Fully as expected Juan Jose Echavarria and his committee decided unanimously on Friday to leave rates at 4.25%, overall there appears to a more relaxed attitude with regards to growth however there are some rumblings with regards to inflation especially in the food sector. In terms of 2018 growth the technical team’s thinking is in line with the Finance Ministry at 2.7% although they also made mention of the fact economy is still below its full utilization rate in terms of production but that should increase as 2018 continues and pent up investment decisions delayed due to the elections come on line. Looking forward to 2019 the committee is looking for productive utilization rates to reach capacity and for GDP to increase 3.7% which is a bullish estimate compared with most overseas agencies estimates. In terms of inflation the committee continue to look for a 3.3% exit level for 2018 and whilst there are the aforementioned concerns over food prices they are no more than a mild concern, elsewhere they have no concerns over regulated prices. The committee continues to be watchful with the Peso, it has been stable over the last year but they are mindful of the volatility in emerging markets and are wary of being prepared in case of devaluations. As ever future Central Bank decisions will be based on data however it is difficult to foresee further cuts in this cycle given the already evident economic recovery, the committee have done diligent work ever since inflation peaked at 8.97% back in July 2016 but now their work is done for the time being. CEMENT We are now into the fifth month of 2018 and there are still indifferent data points coming out of the construction sector, this time the Grey Cement numbers for May which were both in negative territory and in part this ongoing uncertainty is continuing to pressurize the listed names. Production for the month stood at 1,006,900 tons, a decline of 1.5%, YTD the numbers are also in the red with a decrease of 1% thus far. In terms of Dispatches the numbers are similar with a 1.6% decrease to 983,500 tons - YTD the number is down 0.8%. Looking at Construction Licences last week we saw a jump but RMC was benign and that is very much the mixed signals that investors are trying to read but at some point the numbers will turn to the upside in line with confidence and the economy. JUSTICE As we are on the subject of cement and the under performance of the sector during the first semester it is hard to ignore the headlines this weekend regarding Cemex LH junior executives who are now apparently being remanded in custody having not convinced the judge that they were simply pawns in the Maceo bribes scandal - this coupled with the class action lawsuit against CX and their involvement in the price collusion investigation are what have caused this stock to be down over 20% in 2018. In terms of the collusion case they were joined by both Holcim and Cementos Argos and whilst the fines levied were large there is a strong argument for the three defendants, it looks more like a Government levied success tax than a strong legal argument - however when it comes to Maceo the justice system has spoken, the question for Cemex is whether they can ever move ahead with the Maceo expansion, at this point it looks tough. Whilst the above may be a case of the justice system doing their job it has as ever taken an age but not as long as the case against the Interbolsa executives who fleeced some many innocent investors as well as employees. I spent almost three years with the company but left, fortunately, before the roof fell in on their disgraceful behaviour - that was in December 2012, it is now July 2018 and the courts are still struggling to close the case. They have just released Tomas Jaramillo (already condemned to 12 years) to house arrest, not because he is innocent of the rest of the charges but because after all that time the Colombian justice system was capable of putting the rest of the case together - the dismay amongst ex employees and investors is palpable. For the incoming President the reform of the dis-functional justice system is a priority - there are more appeals than VAR at the World Cup and all manner of criminals are using that to avoid the bread and water they deserve.