The Invesco Emerging Markets team spent a week traveling through Colombia and Peru, meeting with company management teams, consultants and government officials. During our trip, two themes were prevalent that could have broad implications for local companies and global investors: the relative under-penetration of modern-format retailing throughout Colombia and Peru, and the severe need for infrastructure improvement.
Expansion of modern format retailing a positive catalyst
Modern-format retailing — which are retail businesses in the form of department stores, chain-stores and shopping malls opposed to bazaars, fairs and homes — in Colombia and Peru has grown modestly over the past decade but appears to be potentially poised for a period of acceleration, as middle-class growth and the increased availability of consumer credit may lead to stronger consumer spending. Clearly, this trend has significant long-term implications for both the retail and consumer sectors in Colombia and Peru.
With regard to the penetration of modern-format retail stores, both Colombia and Peru are well behind some of their Latin American peers, and we believe there is significant room for growth. Sales through modern-format retail stores accounts for less than 30% of total retail sales in Colombia and Peru with the remainder coming from “mom and pop” or informal stores, according to data from Euromonitor and the Peruvian Ministry of Economics. In contrast, modern-format retail stores account for more than 50% of retail sales in Brazil, Mexico and Chile, according to Euromonitor and the Peruvian Ministry of Economics.
We believe the impact of potential growth in modern-format retailing has positive implications for the larger Latin American retailers. What’s more, consumer product and food companies could also benefit from enhanced sales and distribution efficiency. In fact, we are already seeing significant investment in new department stores, grocery stores and drug/convenience stores by major retailers and expect this trend to continue for several years, potentially creating investment opportunities within the retail, consumer and real estate sectors.
Infrastructure spending sorely needed
The poor state of roads, rails, ports, high-speed internet availability, power systems, and water and waste treatment is a substantial headwind to economic growth in these countries, and in the past year they have announced large infrastructure plans — $25 billion over the next five years in Colombia and $20 billion in the next three years for Peru. However, as with most public works projects, the actual timing of construction could vary significantly.
We believe beneficiaries of increased infrastructure spending, in the short term, would include construction service and raw material providers, which are already expecting better-than-average revenue growth in the near term in Colombia — though the Peruvian market for the companies remains uncertain because of the timing and size of cash flows to projects in the country.
Interest from foreign investors in infrastructure development in Colombia and Peru will also be key in relieving some of the burden on their governments to fund infrastructure projects in a timely manner.
Ultimately, we believe that political pressure and economic incentives could drive increased infrastructure spending over the medium term. Eventually, we expect there will be opportunities to invest directly in infrastructure projects in Colombia and Peru, as well as in companies doing the work and providing the raw materials. Longer term, we also see opportunity in sectors that may benefit from improved infrastructure, such as metals, mining and manufacturing.
About risk
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.
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