Tags: Colombia | markets | debt | volatility

Investors Shine on Colombia Markets; Higher Volatility a Risk

Monday, 14 Apr 2014 11:53 AM

The rally in Colombia's capital markets is set to extend at least through 2014, possibly buffering the impact from monetary tightening in the United States but also leading to more volatility, analysts said.

J.P. Morgan's decision last month to boost the weighting of Colombian government bonds in two of its key emerging market indexes to 8.1 percent from 3.2 percent has drawn new investment into the conservatively-managed Latin American economy.

New foreign portfolio investment surged some 146 percent to $1.31 billion in March, from $535 million in February, according to the central bank. The influx reversed the peso's 7 percent decline since the beginning of this year. It is now 0.3 percent stronger versus the dollar in 2014.

"Until a few weeks ago, there was no reason to buy, but now it's the opposite," said Daniel Velandia, head of economic research at Credicorp Capital in Colombia. "There's no reason not to and not be in the market here."

Prices for Colombia's public debt, known as TES, are at their highest level in 10 months, while Colombia's COLCAP index is up 5 percent from Jan. 1, after being down 11 percent at one point earlier in the year.

Emerging markets have been rocked by volatility in 2014 as investors shy away from risk, in part due to expectations U.S. economic growth will accelerate and the Federal Reserve will end its massive bond-buying stimulus program later this year.

"Colombia is clearly bucking the trend against this global theme of de-leveraging with huge net inflows into local bonds in March," investment bank Jefferies wrote in a note to investors.

"This serves as a reminder that there is still policy flexibility to immunize against adverse global trends and the unwind of liquidity."

Camilo Perez, head of economic research at the Banco de Bogota, said: "Probably by the end of the year when we see how emerging markets are looking, Colombia will have some of the best results to show."

Local and international analysts forecast a further $4 billion to $10 billion in foreign capital will go into Colombian bonds over the next year or so, with additional foreign funds bolstering the country's stock market.

"J.P. Morgan has indirectly generated trust in the country, confidence in the market, and this dynamic will extend into shares," said Juan David Ballen, an analyst with the Alianza Valores brokerage.

Analysts, however, reiterated that the increase in foreign investment in local assets raises the risk of higher volatility through external shocks.

"If such inflows reach the upper end of expectations, offshore participation in the TES market could rise from the current 8 percent to 17 percent towards the end of 2015 ... numbers clearly inconvenient for attempts to avoid excess volatility," Colombia's National Association of Financial Institutions said in a note.

The expected end of the Fed's stimulus program, which has kept U.S. interest rates low and pushed investors into emerging markets in search of higher yields, poses additional risks to the market outlook for Colombia.

"The market should, above all in the final quarter, start to operate much more according to global factors that continue pointing towards a stronger dollar as a consequence of the U.S. monetary policy," said Juan Pablo Espinoza, chief economist at Bancolombia.

"There are other risks that cannot be ignored, like the slowdown in the Chinese economy could be stronger than thought."

© 2017 Thomson/Reuters. All rights reserved.

 
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The rally in Colombia's capital markets is set to extend at least through 2014, possibly buffering the impact from monetary tightening in the United States but also leading to more volatility, analysts said.
Colombia, markets, debt, volatility
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2014-53-14
Monday, 14 Apr 2014 11:53 AM
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