Despite a wealth of commodities, banking is leading the way in Peru

Peruvian stocks have outperformed everything else in Latin America so far this year. However, traders who chalk up the rally to the country’s traditional gold and copper wealth would be wrong.

Image courtesy Rom: http://www.flickr.com/people/56118505@N00

The famed mountain-top city of Machu Picchu, Peru

Out of the six country-specific Latin ETFs, the MSCI All Peru (EPU, quote) has given traders the biggest bang for their buck in 2012, with a 20% year-to-date return.

Ordinarily, we would attribute that kind of run to thriving commodity markets — after all, a staggering 53% of EPU’s $553 million in assets is given over to companies that dig raw materials out of Peruvian mines.

However, the real winner lately is actually Peru’s leading full-service financial institution, Credicorp (BAPquote), which has been one of the true stars of Latin America again this year.

BAP shares are up 24.5% over the last three months. Since the stock is the heaviest weighted in EPU at 18% of the fund, it single-handedly accounted for 4.4 percentage points of the Peru ETF’s performance.

And those 4.4 percentage points make a huge difference. If not for BAP, EPU would come in behind No. 2 Latin market Chile (ECH, quote) so far this year.

The more mining-oriented stocks in Peru have done well, but BAP’s surge has been so intense that even blue-chip gold names like Minas Buenaventura (BVN, quote) and Southern Copper (SCCO, quote) have actually acted as a drag on the overall fund.

Of course, the value of an ETF is in the diversification and, at least in foreign markets, the ability to get into companies that otherwise don’t trade on Wall Street.

EPU, for example, contains shares of 25 companies that do business in Peru, only a few of which are available on their own to U.S. traders.

However, in this case, it does beg the question of why traders would want to pay extra simply to accept all that drag in the name of “diversification.”

Since bottoming out after the credit crunch in October 2008, BAP is up nearly 300% and BVN is a poor runner-up with ‘only’ a near-200% advance.

EPU didn’t even come online until mid-2009, when the rally in Peruvian stocks was already well underway.

Still, over that time period, there really isn’t a point at which the ETF would have fared better than a portfolio allocated half to BAP and half to BVN.

So far, EPU is up a respectable 83% over the last 33 months. The hybrid portfolio would have generated 10 percentage points extra.

You know the gold story driving BVN, but why has BAP done so well?

Partly it’s because the company has a stranglehold over nearly all aspects of Peruvian finance: lending, retail banking, insurance.

As the country grows out its economy to support mining development, its previously undeveloped banking sector grows out too. Since 2006, lending has tripled and deposits have more than doubled.

BAP is riding that growth trend, and the stock has demonstrated the results. That’s what emerging markets are all about.

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