Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Peru Could Be the Next Big EM Story
Transcript
- Lucas: So Peru. I know it's not the first country that comes to mind when people think emerging markets. It's not China, not India, not even Vietnam. But there's a case building that Peru might be one of the more interesting EM stories right now. Luna: Interesting how? I mean, they're a copper producer, right? And copper has had a good run lately, but that's not exactly a new story. Lucas: Right, copper is the headline, but what's changed is the macro backdrop. The dollar is strong — trade-weighted index is at 119.3, up from 118.67 just a couple weeks ago. That typically crushes EM assets. But Peru is holding up better than peers. The iShares MSCI Peru ETF, ticker E-P-U, is up about 6 percent in the last month. Compare that to the broad EM ETF, EEM, which is flat. Luna: So it's outperforming in a tough environment. What's the driver beyond copper? Lucas: Fiscal discipline. Peru has one of the lowest debt to gdp ratios in Latin America — around 35 percent. The central bank has been orthodox, inflation is down to 2.8 percent, and they've actually been cutting rates. Plus, the current government has pushed through some mining permits that were stuck for years. That's unlocking new supply just as the world needs more copper for electrification. Luna: But China is the biggest buyer of copper, and China's economy is clearly slowing. Look at the China ETF, FXI, down 1.8 percent in the last five days. Doesn't that cap the upside for Peru? Lucas: It's a risk, no question. But here's the thing — Peru's copper exports have been diversifying. More going to the US, to Europe, to India. And even if Chinese demand softens, the structural deficit in copper supply is real. Goldman Sachs estimates a 5 million ton deficit by 2030. So prices should stay supported. Luna: What about political risk? Peru has had six presidents in five years. That's a lot of instability. Lucas: It's a fair point. But the current president, Dina Boluarte, has been in power since late 2022, which is actually a long stretch by recent standards. And the business community seems to have accepted her. The sol has been stable, foreign direct investment is ticking up. Compare that to, say, Mexico, where the peso strength is hurting exporters. Peru's currency has actually weakened slightly, which helps their competitiveness. Luna: So the weak sol is a feature, not a bug. Lucas: Exactly. And the trade balance is solid — Peru runs a surplus, unlike many EM peers. Export growth was 8 percent last year, driven by copper and also ag exports like blueberries and avocados. Luna: Okay, I'm starting to see the case. But what's the catalyst? Why now? Lucas: Two things. One, the new copper mine, Las Bambas expansion, just got the green light. That'll add 300,000 tons of annual production by 2028. Two, Peru's GDP growth is forecast at 4.2 percent this year, which is above the regional average. If the Fed starts cutting later this year, EM flows could rotate back, and Peru is positioned to capture that. Luna: But the data we have shows the dollar is still strengthening. The yen is weakening, the yuan is weakening. That's typically bad for EM. Lucas: Yes, but markets are forward-looking. If you believe the dollar peaks this year, then the time to buy EM is when the dollar is still strong, not after it weakens. And Peru offers a margin of safety because of that fiscal discipline and commodity exposure. Luna: What about the other copper plays? Chile is the biggest producer. Why not Chile? Lucas: Chile has its own issues. The new constitution process, higher mining royalties, and a more divided political landscape. Peru's regulatory environment has actually improved — the government streamlined permitting. Plus, Peru's copper ore grades are higher than Chile's in some mines, which means lower costs. Luna: So Peru is kind of the quiet, boring EM story that might just work. Lucas: Exactly. It's not flashy. No AI narrative, no consumer boom. But commodity-driven growth with decent governance and low debt — that's a combination that has historically rewarded patient investors. Luna: Speaking of rewarding patient listeners — if today's episode made something click, the way these stay ad-free is listener support. Buy me a coffee dot com slash fexingo. It's a small way to keep the economics conversations going. Lucas: Yeah, we appreciate it. Now, one risk I want to flag — Peru's reliance on copper means it's vulnerable to a global recession. If the US economy really slows down, copper prices could drop 20 percent and Peru would feel it. Luna: But that's priced in to some extent, right? The forward P/E for the Peru ETF is around 11, which is cheap compared to the EM average of 13. Lucas: Right. So you're getting a discount for that risk. And if the recession doesn't materialize, or if it's mild, Peru could re-rate significantly. That's the asymmetry that makes it interesting. Luna: What about the debt market? Are Peruvian bonds attractive? Lucas: Yeah, the 10-year government bond yields around 6.8 percent, which is high in nominal terms but low relative to EM peers when you adjust for inflation. And the credit rating is BBB- from S&P, just one notch above junk. If they get upgraded, bonds could rally. Luna: So equities and bonds both have a case. But for the average listener, what's the simplest way to get exposure? Lucas: The Peru ETF, ticker E-P-U, is the easiest. It holds about 25 stocks, heavily weighted toward mining, but also banks and utilities. Alternatively, if you want pure copper exposure, there are copper futures ETFs, but those are more volatile. Luna: And for those who prefer individual stocks, what are the big names? Lucas: Southern Copper, ticker s c c o, is the largest. It's actually incorporated in the US but operates in Peru. Also Buenaventura, which is a Peruvian mining company. And Credicorp, the financial holding company, which is a play on domestic economic growth. Luna: Credicorp — that's the one that owns Banco de Credito, right? Lucas: Exactly. And it's trading at about 9 times earnings, with a 4 percent dividend yield. So it's a value play with growth optionality. Luna: I think the key takeaway is that Peru is a differentiated EM story. It's not just 'buy copper, hope for the best.' There's a real governance and macro story underneath. Lucas: And that's what we look for — markets where the fundamentals are improving, but the narrative hasn't caught up yet. Peru fits that description. Luna: Alright, let's keep an eye on it. Thanks for walking through that. Lucas: My pleasure. Next week, we'll talk about the other side of the Andes — Argentina, and whether Milei's reforms are actually working.