2015 was characterized by economic deceleration and a general market uncertainty attributed to factors such as the Colombian peso’s devaluation, the fall in petroleum prices globally, a higher rate of inflation, the rise in interest rates, peace process negotiations, and the high effective tax rate. Along with additional factors, this has created a defensive business climate, putting the brakes on expansion projects, capital investments, and other long term endeavors.
On the other hand, the view of Colombia from the outside looking in is much more positive, with investors from private equity to multinational enterprises seeing Colombia as a more attractive investment target, with interesting opportunities due to the aforementioned market conditions. The recent mergers & acquisitions study conducted by Baker & McKenzie along with Merger Market Group, made it clear that countries such as Colombia are becoming more and more attractive for foreign investment, and the quantity of cross-border transactions should rise over the mid to long term.
Domestic executives should prepare themselves for internationalization, and gain a deep understanding of the tools they need to confront and overcome this economic uncertainty.
“While currency depreciation & instability continues in several Latin American countries, the surest thing is that mergers and acquisitions will be led by foreign private equity funds and multinationals during 2016. That is to say that the next year it will be possible to see an increase in the entry of new companies and buyers looking at Colombia as a target market,” said Baker & McKenzie managing partner Jaime Trujillo.
This environment of growing uncertainty creates interesting opportunities for entrepreneurs ready to take calculated decisions, and especially for those organizations that are looking for ways to gain market share, expand operations domestically and internationally, or grow product lines or service offerings.
“The country’s major macroeconomic changes during 2015 cause corporate leaders to re-evaluate their strengths and weaknesses. From the financial perspective, it is important to think of structuring long term capital to take advantage of the opportunities that may present themselves,” affirmed Lorenzo Garavito, the president of HBI Banca de Inversion, Colombia’s leading Investment Bank.
To observe a clear example of the challenges facing the Colombian capital markets one needs to look no further than the Bolsa de Valores de Colombia (BVC), Colombia’s stock exchange; where several of the strongest companies in Colombia have seen precipitous drops in their share prices, even while their operational fundamentals may be stronger than ever. Avianca, Colombia’s major airline; banking conglomerate Grupo Aval; and Grupo Argos, Colombia’s multinational cement and materials manufacturer, are examples of this phenomenon.
The appetite foreign investors feel for Colombian investments is expected to grow significantly in 2016, and as such, many analysts may feel that now is an opportune time for bargain and value investors.
“In the exchange one begins to see a change in sentiment among investors and they are realizing that the market correction we have experienced locally has opened multiple opportunities for entry—not just in the stock market but as corporate bond prices have experienced significant discounts on the secondary market; all these within a context of a two or three year investment horizon,” opined Juan Pablo Córdoba, the president of Colombia’s BVC.
5 Key Financial Factors To Consider
- In the eyes of international investors, Colombia has become an important target, with growing companies characterized by solid financials and a multinational presence, offering considerable investment opportunities in general, but especially now as share prices are likely to be strongly discounted.
- Colombian executives should consider internationalization as a defensive as well as growth strategy; entering new markets and business lines can permit their companies to diversify their risks, and to a degree, sidestep the local instability in order to make strategic decisions and long term investments.
- Private equity funds, law firms, and investment banks have a role to play as protagonists during this period. While foreign investment appetite continues growing, executives will need greater levels of highly specialized guidance and counsel; financial as much as legal.
- The structural adjustments within the petroleum sector will create interesting conditions for mergers and acquisitions while other industries will assume the leadership in production and export. Consumer goods, infrastructure, and telecommunications are example sectors called upon to take on leadership roles in the Colombian economy, something they have not done in recent years.
- Executives should be prepared for a relative degree of illiquidity in the financial markets during 2016, consisting of a decreased availability of resources, and larger spreads, due to the continuing changes in macroeconomic conditions, while the government ramps up spending on major infrastructure projects.
This market forecast was submitted to Finance Colombia by those contributors mentioned herein.