Sunrise Over El Dorado : Alianza : December 21st 2018

DAILY THOUGHT : This will be the last effective trading session of 2018 and perhaps that is a good thing, in dollar terms the COLCAP is sat on 2 year lows at 0.40c (1298/3269) - the market is currently in a funk and again hitting lows, we are still well off the basement of 0.31 seen in 2015 and given that the tax reform is now 'in the price' and the still solid economic outlook surely we are looking at some buying in the short term, granted there are currently an unprecedented number of negative Corporate Governance stories doing the rounds but nonetheless there are options to be found for investors however they may now need to wait for 2019.

MARKETS

The COLCAP dropped 2.55% yesterday marginally squeezing out Argentina as the regions worst performer, it was a merciless day which saw the final capitulation being the closing auction which contributed 0.36% to the loss, as well as 20% of the volume, as the index closed @ 1298.37pts on USD49mn of trading. The most traded stocks were PFBCOLOM (USD 10mn), GRUPOSURA (USD 8mn) and ICOLCAP (USD 7mn) whilst in terms of movement we saw good days for GRUPOAVAL (+4.99%) , CONCONCRETO (+2.94%) and PFGRUPOARGOS (+1.83%), to the downside we saw ECOPETROL (-7.10%) ,HCOLSEL (-4.09%) and CLH (-3.02%)

The Peso traded modest volume once again (USD850mn) however its direction was alarming as it fell 1.5% to 3269.50 - far and away the worst performer in the region due to a combination of oil and the direction of the US. We are heading slowly towards 3300 and that can't be ruled out if headlines in the US don't improve.

The bond market again defied the trend with a decent day as yields fell at the long end of the curve, the 2024 (6.12%) dropped 3.5bps and the 2032 (7.16%) was 4.4bps lower. The exception was at the shorter end where the 2020 rose 2.5bps to 5.09%.

CENTRAL BANK Today the magnificent seven of the Central Bank will sit down to discuss the current economic situation and what to do with interest rates although every man and his dog plus 100% of analysts are expecting no change at this juncture.

As per the most recent Fedesarrollo survey the focus at this point is much more on where inflation will go in 2019 along with interest rates. Whilst the consensus is that inflation will rise to 3.50% here at Alianza for a combination of reasons were are looking higher - 3.85%. This in turn places us in a very small minority who think that rates will rise by a full 1% within the next twelve months, having seen inflation get a little out of hand back in 2016 it is unlikely that the committee will take any risks this time around.

One area where we expect to see continued action is the accumulation of international reserves and here we may well see another USD400mn added to the options recently exercised.

A Few Updates From Around Colombia

El Condor & ISA announced an alliance to chase road concessions in both Colombia as well as over the border in Peru. Both now have ample experience in the sector covering both construction and concession management - this seems a good fit and given the distances between the two offices the two teams will be seeing a lot of each other as they move this forward.

Grupo Exito's CEO has given his thoughts on 2019 in an extensive interview, overall cautiously optimistic and two areas catch the attention - the new tailor-made to clients APPS for Carulla & Exito, influenced no doubt by the equivalent successes in Brazil and the continued effort to drive on-line sales where they will attempt to move 2.5 million deliveries in 2018 to 4 million in 2019.

Corficol reported that subsidiary Episol amidst their legal fight to clear their name have had to mark down further the value of their investment in the Ruta de Sol II project which will be reflected in Q4 numbers but the action was already fully provisioned. Furthermore the Ad-Hoc Fiscal Leonardo Espinosa was sworn in yesterday to examine fully all the events surrounding the Odebrecht case.

Conconcreto have managed to restructure USD200mn of debt that expires on December 31 2023 with a consortium of local banks.

Ecopetrol announced that they have expanded their exploration in assets by taking a 10% stake in the Saturno block (inside Pre-Sal field) with Shell & Chevron the other two partners with 45% each. This is their second holding in this field which brings to 5 the number of fields where they have presence.

Finally for today it appears that the Minimum Salary increase will be 6% this year - whilst this might just add a few basis points to the President's approval levels the next time around it is hard to see how this is justifiable versus an inflation rate that will close the year around 3.30%. Of course readers here wouldn't want to live on $280 per month but given the most needy escaped the VAT squeeze during the tax reform this seems somewhat illogical and will have a knock-on effect on most wage settlements around the country.