Sunrise Over El Dorado : Alianza : January 30th 2019

DAILY THOUGHT : Further to John Bolton's slight faux pas on Monday I offer this tale from many moons ago when first in Colombia. One evening after a couple of late night sherries I found myself chatting to a large US gentleman with a cropped haircut claiming to be a teacher, except he couldn't quite remember the name of the school. He was in fact a military topography expert charged with mapping out the Venezuelan border - that was a Hugo Chavez situation and that situation by his estimate would take a maximum of 10 days to resolve........100% true story........

A quiet day in terms of volume (USD25mn) however the COLCAP rose +0.51% , closing @ 1437.45pts, again MOC auction orders helped the direction somewhat. The most traded stocks were ECOPETROL (USD 3.5mn), PFBCOLOM (USD 3mn) and CEMARGOS (USD 2.5mn). In terms of movement CONCONCRETO (+9.14%) had a big day whilst CLH (+3.06%) and GRUPOAVAL (USD 2.24%) fared well, to the downside were CORFICOLF (-3.09%) ,PFDAVVNDA (-2.51%) and BOGOTA (-0.81%). We are back on a streak again as the COLCAP appears to be gathering momentum, you will see below our call that this could be the start of a slow but steady multi-year bull market however in the meantime we have moved across the 100 day SMAVG - a few days ago when the 50 day was breached there seemed much work to do and the index wobbled but it appears to be back on course. As news dissiminates and people do their calculation on the new rules for the AFP's multi-funds there seems to be belief that equities may finally be set to offer some returns. On top of that people are sure that if Nicolas Maduro hops aboard a boat to Cuba this will be positive for the market - they aren't entirely sure how or when but that may be contributing to the rally.

Source : Bloomberg

The PESO had stable day closing 0.11% stronger at 3154 therefore no bounce in line with the oil price. In terms of volume USD1.1bn very much the average over recent months.

The Bond market saw sizeable strengthening on Tuesday, at the short end the 2020 fell yet further this time by 2bps to 4.98% whilst at the longer end the benchmark 2024 fell 4bps to 6.12% and the 2032 by 5bps to 7.14%.

Our equity and strategy team have been sitting down to discuss prospects for the COLCAP and they seeing what could be the start of a bull market run in Colombia, the all time high for the index was back in 2010 (1942) however due to a confluence of factors we deem it possible that the market will attack that number once again in the coming years, 2019 is likely to be complicated by the overseas situation but this will bring the opportunity to buy on dips before we head north in 2020-2021.

• The COLCAP has effectively returned nothing for 8 years, of course top class stock-pickers have made money but in general, the time for a good run is upon us. It is worth mentioning that strong COLCAP moves have coincided with tough moments for the US and again there are doubts over the direction of the northern neighbours.

• Economic cycle - in 2017 we bottomed out at 1.8%, that should be followed by 2.8% in 2018 and 3.2% in 2019, from there the international agencies are looking for 3.6% in 2020.

• Current market valuation versus both the peer group and historical valuations. We have a current P/E for Colombia at 13.1x which is below the region's 19.3x whilst in terms of P/BV the local market stands at 1.2x whilst the rest of Latam stands at 1.9x. Historically Colombia would be at 20.4c P/E and 1.6x /P/BV.

• The new structure of the multifunds which will come into play in March (although it may take a little longer to flow through) by which more of the new monies coming into the AFPs will flow into the funds with a higher weighting in equities - this will provide a very solid base be it via purchases of direct stocks or ETFs.

So how do we play this ? Looking at a convoluted formula which involves Multiples, Financial Situation & Relative Value versus the COLCAP plus a look at the Governance situations and liquidity we came up with a list of five names we would have locked into the portfolio to enjoy the ride.

• Davivenda

• Celsia

• Grupo Argos

• Grupo Sura

• Corficolombiana

So there we have it, Corficol will surprise considering the newsflow but it's valuation and operational business are very favourable, Davivienda is in favour with most everyone you speak to, Celsia is set to ride out El Niño with no problems and the other two are solid picks which score well in most categories.

REMITTANCES

The money sent back from overseas may not be a significant component of GDP as it is in many countries in Central America nonetheless when an annual number is above USD6 bn it is worth at least a passing mention. The December number of USD616mn was up 15.3% YoY which individually is healthy enough however in unison with other 20%+ months in 2018 we finished with a full year increase of 15.8% moving from USD5.4-6.3 billion. The US remains the main source of those monies, the Q418 data has not been completed but it will be close to the Q318 which showed 48% coming from the north, an additional 15% from Spain with Chile (5.58%) and the UK (1.65%) being the only other two countries considered worthy of a mention by the Central Bank.