Nowadays, there is a debate among local investors about whether the Colombian stocks are overvalued or there still will be meaningful growth. Even though, there is a ample consensus that the Colombian economy has already bottomed, and, therefore, the local stocks will benefit in the long run, I think there is still a long road to the recovery the stock market is so rapidly anticipating and the current stock valuations are overestimating the outlook of the economy and Colombian companies themselves.
The major Colombian stock index, Colcap, has advanced over 59 percent, trailing Brasil and other emerging and frontier markets, However, since hitting bottom, the Colcap has gained over 92 percent which is much in line with other markets
This run-up has not been a consequence neither of an improvement of macroeconomic factors nor companies´ financial over performing, but has it been consequence of excess of liquidity in the market propelled by monetary tightening policy.
Monetary tightening policy is one in which the Central Bank stimulates the economy from both recession or stagnant growth by cutting interest rates in order to stimulate consumer spending, which will translate into more demand for goods and services and therefore more employment.
As the Central Bank´s interest rates are at a historical low of 4.5 percent, the inflows of money spurring into the riskier financial markets increase so as to have better returns from the more conservative financial instruments. Therefore, the demand for stocks in this case intensifies, pushing up the value of the stocks.
That is the reason the market would anticipate the recovery of the economy as the stock market rallies based on the premise that the economy will start growing again. In classic economic theory, that is the case of V-Shaped or U-Shaped recovery.
I, personally, have serious doubts that there will be such a type of recovery neither in Colombia nor in the U.S, as the economic pillars of the latter will be reflected throughout the globe, including Colombia. However, this will be another topic to discuss later on.
Nevertheless, high expectations that Colombia and the world economy will have a V-shaped recovery has propelled the local market too far and too fast, with gas running out if the economy does not meet the market´s expectations rather sooner.
So here is where valuations of the stocks come.
One of the most-followed market indicators is the PER, Price –Earnings – Ratio, which measures the time a stockholder may recover his/her investment via company’s profits.
In order to have a clearer view, one has to compare the PER with its historical value and the PER of the region. By both standards, the Colombian stock market has exceeded itself to a larger extent.
According to Bloomberg, Colombian historical PER has been 16.7 since 2005, whereas nowadays is over 28. On the other hand, as stated by the same sourced, the PER of the MSCI LATAM, is about 16.3 times earnings. Thus, by both metrics, the Colombian stock market would seemingly look expensive to its regional peers.
But there still another reason.
As the earnings seasons comes to an end, the major Colombian stock indexes have retreated over 8 percent following disappointing revenue and net earnings from most of the companies listed in the Colombian Stock Exchange.
Net earnings and revenues from Cementos Argos and Exito disappointed, despite high expectations of improvements. Cemargos is focused on the construction sector while Exito is the biggest local retailer. Also, earnings from Ecopetrol were below expected, even though some financial pundits now are saying it was expected.
These financial reports not just have shown that the economy in the third quarter did not have the positive impact many were expecting, but has pushed PER valuations of many stocks to levels not seen before, as it is the case of Ecopetrol.
But it seems the market has been anticipating itself to these poor reports. Since October 8th, the Colcap has fallen over 8 percent and the sell-off has extended to hard-core assets such as Grupo Sura, Inverargos and Grupo Nacional de Chocolates.
In conclusion, the Colombian Stock Market is outrageous overvalued and is actually erroneously anticipating a v-shaped recovery that I, personally, believe will not happen in the short term.
Author Luis J. Rodríguez is CEO of e-Bursatil.com.co, a website focused on Colombia’s financial market