May 10, 2011 / 9:50 PM / 8 years ago

As Peru's prez vote nears, investors dump stocks

* Political risk too high for Peru investors

* Funds reduce exposure on increased uncertainty of result

* Few bet for little change after June election

By Manuela Badawy

NEW YORK, May 10 (Reuters) - Less than a month ahead of Peru’s presidential election, uncertainty over the economic policies of the next ruler is spurring many foreign investors to scale back their exposure.

Nationalist candidate Ollanta Humala and right-wing lawmaker Keiko Fujimori are in a statistical tie — even though Fujimori recently gained a slight edge — and both candidates are making investors uneasy in their own way.

The greatest fears are that Humala, who says more must be done to spread the benefits of growth to the third of Peruvians living in poverty, would roll back years of free-market reforms and hurt foreign investment, especially in Peru’s vast mining sector.

But on the other side there are also concerns that Fujimori is an unknown quantity — even though she has talked a market-friendly line in her campaign.

BlackRock money manager Will Landers, who oversees about $10.5 billion in Latin American assets, has cut his investment by half to 2 percent of his portfolio going into the elections. He said investors will not assume that Humala will be more like Brazilian former President Luiz Inacio Lula da Silva, who promoted stable fiscal policies, rather than Venezuela’s Socialist leader Hugo Chavez, Humala’s former political mentor.

Humala, who caused ripples within the international investment community with his hard-line tone during the 2006 election, has moderated it by promising to keep inflation low, run a balanced budget, and respect Peru’s many free-trade pacts if elected on June 5.

Many investors, however, are still fearful. Just recently, Humala managed to outrage Peruvians and investors alike by proposing to use private pension funds to finance a government-run retirement system for people over 65.

“Nationalizing pension funds doesn’t work either as we saw with Argentina,” said Landers, adding that he would further cut his holdings in Peru, even if prices fall, if the situation there does not improve or if Humala wins and his policies are not market friendly.

Bill Witherell, chief global economist and international portfolio manager for Cumberland Advisors, said he eliminated all of his exposure to Peru ahead of the elections and due to the recent drop in the country’s stock market.

The local stock market .IGRA has bounced back from a 22 percent drop in late April, losing about $18 billion in value. It recovered slightly last week after a poll showed Fujimori with an edge over Humala.

But the rise of Fujimori — the daughter of jailed former President Alberto Fujimori, who introduced free-market reforms two decades ago — is not enough to convince many investors that Peru is a good place to be right now.

“Keiko Fujimori is not a clear story as we would hope,” said Michael Reynal, who runs the $1.7 billion International Emerging Markets fund, of Principal Global Equities. “She has said she wants to maintain a pro-privatization, external investment type, but we know very little of her and her experience.”

Donald Elefson, co-lead portfolio manager of the frontier fund at Harding Loevner Funds, sees strong risks on both sides of the political equation, noting, “There is a new awareness of political risk regarding stock investment.”

Elefson, who manages the $210 million fund and held more than 3 percent of Peruvian assets in the fund before the elections, sees no convincing upside no matter who wins on June 5.

“You have got nothing to gain because if you buy and Fujimori wins — the market goes up but then it’s coming right back down and settling in,” he said, referring to expectations of a relief rally that would not be sustained by Peru’s fundamentals. “At the same time, if Fujimori doesn’t win you will lose a lot more that you are going to gain,” he added.

Of the 1,600 portfolios worldwide that currently own Peruvian stocks, only 250 devote 1 percent or more of their assets to Peru, and only 18 portfolios have 5 percent or more, according to Lipper, a Thomson Reuters company that tracks mutual fund data.

Elefson’s fund is underweight Peru relative to its benchmark, as well as Reynal’s $1.7 billion International Emerging Markets fund.

Yet Reynal is slightly more optimistic about the outcome.

“My hope is that both candidates in the next few weeks make positive statements in regards to the economy and maintain state of play. Fujimori has done that, and to give Humala credit, he has started to make moves that way and that’s why you don’t want to bail out,” Reynal said.

Jacek Dzierwa, global strategist at San Antonio, Texas-based U.S. Global Investors, which has $3.1 billion of assets under management, is even more optimistic, seeing a buying opportunity in the current uncertainty and market volatility.

Dzierwa, who manages emerging market and commodity-based equity assets, is hopeful that even if Humala wins he will hold steady for about 12 to 24 months before making any radical policy changes.

“We haven’t been selling because I just hope that if Fujimori wins, the market will go up by 35 percent probably within a month. If Humala wins you will not see any radical measures from Mr. Humala,” said Dzierwa, who expects that Humala would follow a path similar to outgoing President Alan Garcia..

“If anything it is going to be very similar to what Garcia did when he started his presidency.”

Dzierwa holds shares in only two companies in Peru, Credicorp (BAP.N), Peru’s largest financial holding company which owns the country’s biggest bank, and Grana y Montero (GRA.LM), Peru’s largest construction and engineering services firm.

Dzierwa said the market’s volatility makes for a good entry point. “Do you want to wait for the resolution of this crisis and then it might be too late?” he said. “You have to take a stand.” (Reporting by Manuela Badawy)

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