Peru Presidential elections - Impact on your portfolio?

April 22, 2006

On April 9, Ollanta Humala got 30% of the vote, which means a run-off ballot in six weeks. The second runner up will be decided when all votes are counted.

What It Means:

Like many other recently elected leaders in South America, Humala is a government outsider who promises more benefits to the poor people in his country from corporations who do business there. In Peru, these businesses are primarily mining and natural gas companies. The current high prices of commodities is increasing the bargaining power of these new leaders, who realize it is a sellers’ market.

At risk is a pending free trade agreement with the U.S., which promises lower tariffs on both sides, and increased ease for foreign investment in Peru. These could help increase trade and economic growth in Peru, which is why the current government is trying to push the agreement through the Legislature. Humala opposes the agreement, stemming from fears it will put existing small farmers out of business, due to increased competition from U.S. imports.

Similar agreements are being negotiated with Ecuador and Columbia. Humala’s victory could jeopardize their success.

Action Steps:

This ongoing nationalistic trend hinders growth of U.S. large cap, multi-national corporations in these countries, which face higher costs from proposed taxes and tariffs. Although you should, of course, have large cap mutual funds in your portfolio, they should comprise a portion of your U.S. allocation - which should not be more than 30%.