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July 20, 2011 10:52:22 | in finance, stock market

Peru stock market calms towards inauguration of Humala

peru
The Lima Stock Exchange reacted negatively on news of leftist Ollanta Humala's election, but has recovered to pre-election levels as the incoming president signals a centrist approach. (Photo: LivinginPeru.com)


By Carlos Arias Vernal

Since March 2011, the Peruvian economy has decelerated as a result of a halt in private investment. Many companies have withheld from doing further investments until having more clarity about how the new government is going to handle the economic policy.

The Peruvian economy has been growing at an average rate of 5.7% over the last 10 years and at a rate of 7.2% over the last 5 years. In order to keep growing at a significant pace it needs to keep private investment engaged.

This deceleration is in great part a result of the perception of incoming president Ollanta Humala's changing messages.

peru
Julio Velarde will be kept as chair of Peru's central bank.
See photos of the Lima Stock Exchange.
Humala has transited from being a strong economic statism advocate on its 2006 presidential campaign to become a dovish private investment friendly candidate by the end of the 2011 campaign. Naturally, private agents are wary and demand further proofs of Humala's change before committing new capital.

This way of thinking is keeping money on the sidelines of the Lima Stock Exchange in a “wait and see” attitude, creating an interesting investing opportunity.

On June 6, the day after the presidential election was won by Humala, the biggest one day sell-off recorded in the history of the Lima Stock Exchange took place and the IGBVL, the Peruvian Stocks General Index, dropped by 12.5% in a single day. The index has fully recovered since and is now trading at 21,178.6, only 0.23% under the level it held before the presidential election.

It has been very telling that almost a third of the IGBVL recovery has been achieved on the day after Mr. Humala announced that the current head of the Central Bank, Julio Velarde, is going to stay in his position. Velarde has earned a reputation as an effective central banker that has been in partly responsible of the Peruvian economy evading the global financial crisis.

There is a high probability that during the months following the presidential transfer an important part of the money that has been sitting in the sidelines would start crawling back to the Lima stock exchange driving up the prices of the stocks listed there.

Furthermore, the recent integration of the Peruvian, Colombian and Chilean stock markets through the Integrated Latin American Market (MILA) will put Peruvian stocks in the radar of foreign investors and will further boost the demand for Peruvian stocks and will consequently drive its prices up.

Given the described dynamics and the constant reassurance that Humala will keep on place the favorable conditions for private investment, this moment represents an interesting opportunity for investing in the Lima Stock Exchange.

Carlos Arias is a stock market analyst at Andes Securities S.A.B.

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