Charles Dickens Senore:
=DJ A Tale Of Two Markets: Colombian Stocks, Venezuelan Debt
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By Shumita Sharma
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Colombia and Venezuela have a long common border, but in financial market performance, they share precious little.
While Colombia's stock market posted the second-highest returns in the world last year, those out of Venezuela's equity market were the worst. On the debt side, Venezuelan global bonds outperformed those from Colombia, turning in the second-best returns among major emerging markets.
The reasons for the differing performances can be narrowed down to market perceptions of political and regulatory risks, as well as on the booming price of oil.
Ben Laidler, an equity strategist for UBS Investment Research, says the sharp divergence between the two Andean countries' bourses can be explained by "a significant increase in political risk in Venezuela and a combination of lower political...and lower economic risk in Colombia."
As a result, Laidler has a "fairly positive outlook" for Colombia and has recommended the country in UBS' strategy portfolio, but sees "very little to buy" in Venezuela, on which UBS has zero weighting.
In contrast, Gautam Jain, a debt strategist at Barclays Capital, believes that "from the point of view of political risk, there's more of a calmer environment in Venezuela."
To be sure, nationalism is on the rise in Venezuela under leftist President Hugo Chavez, who faces no opposition in Congress after political rivals boycotted a December election to protest an allegedly biased electoral authority. But for the global bond investor "as long as he stays current on debt," concerns over Venezuela are limited, Jain said.
There's little worry that Venezuela will default on its sovereign debt in the foreseeable future. Although social spending is rapidly rising and inflation is running in the double-digits, record-high global oil prices are masking poor economic policies.
Venezuela, the world's fifth-largest crude exporter, has received a revenue windfall from its oil exports, which in turn have led to significant improvements in its external debt and liquidity positions.
According to Morgan Stanley, Venezuela's economy is forecast to grow 8% this year, after expanding an estimated 9% last year and 17.9% in 2004. Although those high growth rates are a rebound from a deep economic recession earlier this decade, they are much more impressive than the annual growth rates of just above 4% that Colombia has posted in recent years.
But all that hasn't done much for the global equity investor looking at Venezuela. The Morgan Stanley Capital International index for that country dropped nearly 29% in 2005, while the same benchmark index for Colombia zoomed 102%. In 2004, Colombia jumped 126%, while Venezuela was up about 45%.
So far this year, the MSCI indexes for both countries have gained roughly the same - around 8.5%. But analysts aren't putting the two in the same investment category.
"The (Venezuelan) economy is fairly strong, but it's a much more interventionist business environment in general," said UBS' Laidler. "Large parts of the economy have price controls and high tariffs... it's stopping people from making investments there."
Venezuela's small equity market - with a capitalization of just $2 billion on the MSCI compared with Colombia's $12.5 billion - has also faced a tough time due to troubles at CA Nacional Telefonos de Venezuela (VNT), or CANTV. The company, which is Venezuela's largest telecommunications provider and accounts for two-thirds of the country's MSCI index, has suffered several regulatory setbacks.
A big hit came from a Supreme Court ruling last year that required CANTV to raise pensions for workers and retirees - a move that CANTV says will cost as much as $333 million. It reported a $203.3 million loss in the third quarter of 2005 compared with a net profit of $74 million in the same period a year earlier after provisioning for the pension adjustment. Then, earlier this month, Venezuela's telecom regulator slapped a $45.5 million bill on CANTV for unpaid dues.
Even in the oil sector, the government is introducing new rules, such as the enforcement of new oil contracts for private oil companies that give state-run oil firm Petroleos de Venezuela SA (PVZ.YY), or PdVSA, a controlling stake of 60% to 70% and a larger say in daily operations. In the real estate sector, Goldman Sachs in a research report also pointed out that the government is studying the possibility of regulating real estate prices in addition to rents.
"The growing number of government regulations is leading to growing inefficiencies and costly resource allocation distortions," it added.
Meanwhile, in Colombia, President Alvaro Uribe's hard line against leftist guerilla groups, a stable and robust economy and a recent spate of mergers and acquisitions have all been boosting the local stock market to multiple historic highs.
"There's progress on the security side and on the economic agenda, which has crystallized into more investor confidence," said UBS' Laidler. He noted the $9 billion takeover of Colombia's Bavaria (BAVARIA.BO) by the world's second-biggest brewer SABMiller PLC (SAB.JO), which includes pay outs to minority shareholders who are plowing the money back into other stocks.
Colombia's solid economic factors have helped its bonds as well, with the country's returns on JPMorgan's 18-country Emerging Markets Bond Index Plus up 12% last year, slightly more than returns for the asset class as a whole. Venezuelan returns outstripped the market even more, gaining 15.7% last year.
But according to Barclays' Jain, Colombia didn't perform significantly worse than Venezuela as its credit rating is a notch higher. "If the market is rallying, higher yielding countries will do better as there's more room for spreads to tighten," he said. "Colombia did very well last year on a risk-adjusted basis."
-By Shumita Sharma, Dow Jones Newswires; 201 938 5240; shumita.sharma@dowjones.com |
