Colombia's investment outlook - BBH

Analysts at Brown Brothers Harriman explained that oil is the number one driver for Colombia.

Key Quotes:

"WTI oil has rallied 90% off the February low near $26. The supply-demand dynamic has been distorted by some disruptions, however, such as the wildfires in Canada. OPEC is unlikely to change its current stance at the upcoming June 2 meeting in Vienna. As such, further gains in oil may be difficult to sustain.

The peso has outperformed within EM. In 2015, COP lost -25% vs. USD. This compares to the worst performers ARS (-35%), BRK (-33%), ZAR (-25%), and RUB (-20%). So far this year, COP is up 3.6% YTD, behind only RUB (up 11.6% YTD), BRL (9.9%), and MYR (4.6%). This outperformance is likely to ebb, as our EM FX model shows the peso to have VERY WEAK fundamentals. Retracement objectives for the February-May drop in USD/COP come in near 3060, 3135, and 3210.

The central bank instituted a new FX intervention mechanism back in October. Initially, it offered $500 mln of dollar call options whenever the exchange rate was 7% weaker than its 20-day moving average. The threshold was lower to 5% and then to 3% currently. The options sale was triggered last week for the first time. Governor Uribe noted at that time that the bank could undertake other ways of intervening, such as discretionary dollar sales.

Colombian equities have outperformed within EM. Last year, MSCI Colombia was down -43% vs. -17% for MSCI EM. So far in 2016, MSCI Colombia is up 16.3% YTD, and compares to 0.1% YTD for MSCI EM. This outperformance could ebb a bit, as our EM Equity model has Colombia at an UNDERWEIGHT position.

Colombian bonds have done well this year. The yield on 10-year local currency government bonds is down -52 bp YTD. Compare this to the worst performers Poland (+13 bp), China (+11 bp), and Hungary (+11 bp), as well as the best performers Brazil (-359 bp), Peru (-100 bp), and Indonesia (-82 bp). With inflation likely to remain high and the central bank still tightening, we think Colombian bonds could start underperforming more."