Colombian Update : The MILA Puzzle

THE SUMMER ROLLS ON

The markets here in Colombia remain quiet with little volume and less direction - the big hope during the first half of 2018 was that we would see a post election surge in volumes providing of course a market friendly candidate took up residence at the Casa Nariño - well President Duque has now arrived and basically nothing has changed although that can hardly be placed at his doorstep. Things have, in a case of bad timing, come awry in Emerging Markets with Turkey threatening to spin off its axis - having survived the coup attempt of 2016 in surprisingly good condition President Erdogan has come up against a foe in the shape of Donald Trump who has proved a bridge too far. This of course has had a contagion effect across EM and naturally Latam has also suffered. Some say that Latam and the Andean region in particular should be somewhat isolated from the ongoing issues in Ankara but history has taught us that whichever way you may calculate debt or point your slide-rule, in the end Emerging Markets are joined at the hip - some more loosely than others but joined nonetheless. Colombia is part of this equation and with oil having retreated from recent highs due to a plethora of issues another part of Colombia's body armour has come loose at precisely the moment when we are bedding in a new President who is facing a lengthy to-do list. Perhaps the good news for Colombia is that despite anemic volumes we are not alone - misery loves company as we all know and the room is pretty full at this moment. THE PUZZLE A day or so ago the latest MILA update arrived and clearly these are not wild days for the four markets involved - Colombian volumes were down almost 11% in July YoY, the month remember when we would start seeing the post election snap back, we were not alone as Chile was down 30% for the same month - YTD it has been something of a struggle and the election of AMLO in Mexico is likely to bring caution to the north in the short term. But all this is well known and documented, simply go to the office and watch the trading desks at work, or not as may be the case, and we all get the picture. What I would prefer to take some time considering is just why MILA which was signed into law way back in 2009 with the market officially opening for business in 2011 and Mexico joining three years later has come up short in terms of being a new catalyst for market liquidity. The concept of cross border trading between Chile, Colombia & Peru was ambitious as beyond London and Milan there are few, if any examples of such structures - but as we well know fortune more often than not favours the brave and Juan Pablo Cordoba who was the driving force behind the alliance and his team at the BVC should be applauded however that bravery has not been rewarded thus far. Having attended events at the time as CEO of Celfin Capital both here and in Santiago there was tremendous excitement at the prospect of increased volumes and new investment options for clients - what better for a Colombian than to be able to invest in Falabella which had been such an instant hit as the first true department store to open in the country ? Whilst there have been multiple funds created to mirror the MILA market and we have also seen initial attempts at cross-MILA issuance's the reality is that the numbers don't lie and for a market that today has a combined market cap of approx USD973bn there need to be some sort of re-think between the exchanges, the issuers and the brokerage houses operating in those countries, in my experience there is both misunderstanding and an unwarranted apathy towards the product. NUMBERS Since May 2011 there have been a total of 28,196 operations on the MILA exchange across the four countries for a gross total of USD593mn of traded volume - just over half of what traded in Colombia last month which was quiet. Of those trades 65% have been in Chile and if my memory serves me (it may not at my age) two enormous transactions purchasing and selling the aforementioned Fallabella by Peruvian funds account for much of that. It is a crying shame that such a bold venture, with the software literally engineered by a man who I met at the Bogota launch after a lapse of about 20 years, hasn't been more fruitful - perhaps it was ahead of its time, Colombia has relatively few years on the capital markets clock, Peru at the best of times has languid volumes due to costs so high that there own AFPs avoid trading there and Chile never seemed to be fully convinced of the need. Arguably one missed opportunity was when the BVC came close to taking over the BVL - this was understandably scuttled due to the pending arrival of Ollanta Humala as the President of Peru but one can't help wondering about the difference that would have made not just to MILA but to the volumes on the BVL itself. FRINGE BENEFITS But as is often the case in life we can get too wrapped up in the numbers because personally speaking there is has been an interesting and very valuable side effect - although MILA hasn't developed as desired as a market, MILA as a concept most certainly has. It has moved alongside phrases such as BRICS and ahead of CIVETS, it's now a block both metaphorically and physically and that has great value. It has been an educational process for brokers and funds in all three markets, names such as Falabella in Colombia have moved beyond being simply where you chose to have your wedding list - they have become household names, if there is takeover bid or important news relating to a stock in another country invariably those in the market will be following the story. If we overlay this improved knowledge with the multiple cross border M&A activities both before and after MILA was created we find ourselves appreciating more what has been created. MILA has found a space for itself in terms of conferences - I remember being amid a multitude of companies from the three countries (pre Mexico entry) in Santiago and it was an event that had found it own identity, at such events there has been a healthy cross pollination of ideas and knowledge. The next step is to reboot the concept, it won't be easy, remember it was only last year Chilean AFPs got permission to trade individual stocks overseas and there are still limitations for many institutions across the region so educating the masses will be a challenge however it must be attempted. It will require commitment from the Governments and those especially who legislate the Capital Markets of all four countries because a functioning MILA could draw in secondary listings from all manner of countries in regions such as Central American where it is case of whether a stock trades on a daily basis, not how much. I remember sitting at a conference in Panama many moons ago listening to a keynote speaker from the IMF or IFC (memory again an issue) and they warned that the 7 markets of Central America needed to merge or they would go nowhere - they have done nothing and gone precisely nowhere.