Goldman to Citigroup Wager on World-Beating Colombian Rally

Updated on
  • Colombia next ‘turnaround story’ like Brazil, Russia: Goldman
  • Citigroup recommends being overweight bonds as oil suppportive

Some of Wall Street’s biggest banks are betting that a world-topping rally in Colombia’s peso bonds last month has a lot further to run.

Goldman Sachs Group Inc. last week named the country as its top pick on the expectation a rebound in the price of oil will help the commodity-dependent economy recover from its slowest growth since 2009. Analysts at Citigroup Inc. turned overweight on the bonds in a Sept. 2 report, saying the end of central bank interest-rate increases may lure inflows.

Goldman and Citigroup are joining Franklin Templeton and BlackRock Inc. in calling for a rebound in Colombian assets after a drop in oil revenue exacerbated the budget deficit and inflation reached the fastest in 16 years. The country’s current economic upheaval is similar to slowdowns in India, Russia and Brazil in the past five years that led those countries to embark on market-friendly fiscal adjustments, and spurred a rally in their currencies and bonds, according to Kamakshya Trivedi, the London-based chief emerging-market macro strategist at Goldman Sachs.

“You often find the best return potential in turnaround stories,” Trivedi said in an interview last week. “Colombia is one of those countries.”

Colombian local-currency bonds handed investors returns of 5.8 percent in dollar terms last month, the most among 31 emerging-market peers in a Bloomberg index, as crude, the nation’s biggest export, rebounded from a two-month retreat. The peso was the best-performing major currency in the developing world, jumping 3.3 percent.

Colombian government bonds advanced for a fifth day on Tuesday, with the yield on benchmark peso notes dropping 15 basis points to 6.93 percent. The peso rallied 2.2 percent, the most since June 29.

Franklin Templeton bond manager Michael Hasenstab, who has outperformed peers in the past decade by correctly betting on turnarounds in bond markets such as Ireland and Hungary, plowed $1.6 billion into Colombian debt through the second quarter. That made Franklin Templeton the biggest single foreign holder of the bonds, according to data compiled by Bloomberg.

Colombia is one of BlackRock’s three top picks in emerging markets, along with Russia and Indonesia, head of emerging-market debt Sergio Trigo Paz said in a Bloomberg TV interview on Monday.

Investors will take advantage of a carry-trade opportunity in the Colombian peso as the central bank pauses following 3.25 percentage points of increase in its key rate in the past year to 7.75 percent, Citigroup analysts including Kenneth Lam wrote in the report. 

The rebound in oil is luring investors into currencies of commodity exporters. Brent jumped 11 percent to $47 a barrel last month, after a 15 percent slump in July.

“If oil prices stay in the $45-$50 range that our commodity team expects, Colombia could be the next place that outperforms,” Trivedi said. “That’s one place where I see much more appreciation relative to forward markets.”