Colombia as an Event-Driven Play

Bet on the long-awaited political shift from left to right

Map via Infoplease.com

The Core to Periphery process is in full force. The capital outflows from where it is inadequately treated to where it is better treated.

EMs have been a dead money trade for more than a decade. However, the gears are shifting. Capital has begun to flow from the core to the periphery. I bet this will be the norm for the coming years, i.e., emerging markets will become a hot spot for Alpha hunters.

This is Part 2 of the LatAm March issue. I originally planned two publications, one for Brazil and one for Chile & Colombia. The plans have changed. Each country deserves its own report. So, it's time to talk about Colombia as an asymmetric opportunity.

Colombia is a widely popular destination for tourists, yet it remains largely unknown to investors. I bet that will change in 2025 and 2026. Politics is the prime reason. The country is on the verge of change.

The incumbent president, Gustavo Petro, is progressively unpopular. Chart via AQ.

His disapproval rating is quite impressive. Colombia will hold presidential elections in 2026, and given the current polls, Petro’s odds of winning are decreasing.

As you know, political dynamics are potent catalysts for investors. Political climate changes act as risk indicators. The more to the right the pendulum moves, the lower the risk is perceived. Investors are already anticipating the change, which is evident in Colombian equities performance. For the first quarter of 2025, Colombia is among the top-performing markets. iShares Colombia (GXG) realized 19% gains year-to-date.

Apart from politics, a crucial role in the Colombian revival is its demographics. Population structure and size are the ultimate long-term drivers for economic growth. The Colombian population is relatively youthful, with a median age of 32.5 years and a significant proportion of individuals in the working-age group (64.1%).

In summary, the young population acts like a tide, while political change is akin to a local sea current. Both combined act as tailwinds for the Colombian economy.

That said, let’s move on. Our first stop is Colombia’s macro picture: fiscal policy, interest rates, export figures, and economic growth.

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The economy: budget, rates, and exports

Last week was turbulent for Colombian politics. Finance Minister Diego Guevara announced his resignation after only three months in office. This decision was reportedly due to disagreements with Gustavo Petro over budget cuts and fiscal policies.

Guevara's tenure was marked by efforts to manage Colombia's fiscal challenges, including considering postponements of budget expenditures for 2025. However, his approach clashed with Petro's vision, resulting in his resignation. This change is part of a broader cabinet reshuffle by Petro, who has replaced several ministers since taking office.

The resignation led to a depreciation of the Colombian peso by up to 1.4% against the U.S. dollar and negatively affected the country's dollar bonds. This fact is not intended to undermine my thesis but rather serves as a reminder that investing in emerging markets requires the ability to withstand volatility. Events like officials' resignations are not uncommon, and they have an intense but short-lived impact on markets.

So, let’s examine the challenges facing Colombia in 1Q25. The first one is fiscal policy. It is centered around maintaining a high spending rate, with the proposed budget set at COP 523 trillion (approximately USD 123.9 billion). The reliance on international funding and the issuance of bonds will continue, with a focus on managing fiscal risks while offering attractive returns to investors.

As of 2023, Colombia's government debt-to-GDP ratio was 54.3%, and it is projected to reach 55% by the end of 2025. This level of debt is sustainable but not ideal for an investment-grade country, highlighting the need for fiscal discipline.

In January 2025, Colombia's Central Bank decided to maintain its interest rate at 9.5%. This decision reflects a pause in the Bank's policy of moderate interest rate cuts, which had previously reduced the rate from 13% at the beginning of 2024. The decision was influenced by inflation rates and external financial conditions, with inflation closing at 5.2% in 2024.

Colombia's major exports are crude oil, coal, and coffee. As shown in the image below, they account for nearly 50% of total exports. Chart via OET.

Colombia is one of the leading crude oil producers in LatAm. As of December 2023, production reached 776,000 barrels per day, an increase from 754,000 barrels in December 2022. However, production decreased to 759,000 barrels per day in November 2024. Ecopetrol, the state-owned oil company, plans to maintain production levels in 2025 by drilling between 455 and 465 development wells, with a focus on optimizing resource use. Despite these efforts, crude oil exports declined by 12.6% in January 2025 compared to the previous year, reflecting the impact of global market dynamics.

Colombia's coal exports have faced mixed trends in recent years. In 2024, thermal coal exports have grown by 12% year-to-date, driven by increased demand from Asia, particularly from South Korea, Japan, and China. This shift reflects a reorientation of Colombia's coal trade away from Europe, where demand has declined due to energy transitions and reduced reliance on fossil fuels. However, Colombia's coal sector faces challenges in competing with dominant suppliers like Australia and Indonesia due to high transportation costs. Additionally, the government’s extension of a 1% export levy through 2025 could hinder competitiveness, especially for smaller mining firms, further straining the sector's outlook.

Colombia's coffee exports are expected to reach 12 million bags in the 2024/2025 marketing year, driven by stable demand and improved production practices. The United States remains the top export market, accounting for nearly 40% of shipments. Exports to China have surged significantly, increasing by 246% year-on-year, now accounting for 7% of total exports. In January 2025, coffee exports experienced a notable 107.7% increase, primarily due to higher demand in the United States.

Let’s discuss a few key points about export destinations. Major trading partners are the US, Mexico, and Panama. On the other hand, the reliance on China is low compared to Brazil or Chile. This could be a curse when the Chinese economy is booming. However, it is a blessing when the Dragon is weak.

From a risk mitigation standpoint, a broader portfolio of export partners is better. Additionally, the majority are in the Western Hemisphere. So, the impact of world supply chain shocks is limited. However, the weak link remains the Panama Canal.

For 2025, Colombia's GDP is projected to grow by approximately 2.7%, driven by low inflation, increased internal consumption, and lower rates. This growth is slightly lower than initial projections of nearly 3% but remains promising compared to other major economies in the region. The OECD estimates a somewhat lower growth rate of 2.6%.

In conclusion, Colombia's economic development in 1Q25 is an interplay of fiscal challenges, export growth, and economic expansion. Let’s check the pulse of the bond market. Does it match the expectation of economic growth and declining risk?

Fixed Income market

In April 2024, Colombia entered the global market with a $1.3 billion bond offering, supplementing its existing 2035 and 2053 bonds. Despite US 10Y yields, the deal attracted strong demand, peaking at $10.1 billion, or approximately 7.8 times the amount issued. This success underscores investor confidence in Colombia's creditworthiness, particularly for high-quality BB-rated issuers.

Domestically, Colombia's government bond yields have been stable, with the 10-year yield hovering around 11.51% as of March 2025.

Colombian 10Y yields are signaling erratic risk perception among investors. Political uncertainty is the reason. On the other hand, Colombian corporate bonds are performing well.

Let’s take Ecopetrol's fixed-income instruments. The national oil company has several issues that trade near or above par. Similar is the situation with perpetual bonds issued by Colombian enterprises. For example, Colombia's Telecomunicaciones 4.95% July 2030 issue has been in a bull trend for the last several months.

The Colombian corporate bond market is not the largest in the region. The number and size of large US-denominated issues are lower compared to those in Brazil or Argentina. Therefore, new issuances denominated in US dollars are scarce.

In April 2024, RCI successfully raised approximately $53 million through a public bond offering on the Colombian Stock Exchange. The issuance was oversubscribed, indicating strong investor interest in the local market. Like Brazilian bonds, Colombian fixed-income instruments have been offering real yields for the last decade. Even after the recent rate cuts, they are an attractive proposition for income investors.

Government bond performance follows increased political uncertainty. Corporate bond gains, on the other hand, indicated that investors are gradually shifting their opinion on Colombia. The recent performance of Colombian equities confirms that.

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Investment Opportunities

Let’s start with the basics. A market's relative performance is a useful indicator of how it is valued.

GXG trades in a wide range. Yet, since 2023, it delivered more than 50% gains. When compared to SPY, it remains incredibly undervalued. GXG/SPY has just pierced the 10-month moving average.

Then, where to seek Alpha?

The Colombian equity market offers limited options for foreign investors. The table below shows US-listed ADRs. Chart via Opaque Markets.

The first listing, Almacenes, is no longer available. So, the number of tradable securities in the US is five. The limited number of ADRs means there are no liquid options on Colombian equities.

Unsurprisingly, the top performers are the Colombian banks, followed by Ecopetrol.

This is the same pattern we observed in Argentine equities during the 2023-2024 period. The first runners were banking conglomerates, including Grupo Galicia, Banco BBVA, and Banco Macro, followed closely by YPF SA.

The banking industry is the first to sense decreasing economic uncertainty. Apparently, investors are assuming lower downside risk for the Colombian economy and equities. State-owned energy giants, such as YPF and EC, to a large extent, represent the state's economy and its associated risks. The higher the stock trade, the lower the perceived risk. Ecopetrol share performance confirms that observation.

How to bet on the Colombian bull market?

For EU-based investors, investing in GXG is not possible. There are GXG options, but they are illiquid. Then, the only alternative is to pick individual names or to create a basket of all available stocks.

My approach resembles the second option with a twist. I have in my portfolio Bancolombia, Grupo Aval, and Ecopetrol. The emphasis is on the banking industry. In this way, I gain exposure to the fastest horses in the initial phase of a bull run.

A few words about GeoPark: it is a Canadian E&P company with exceptional operational and financial metrics. However, investing in GeoPark shares is not equal to betting on the Colombian economy revival. A case in point is Vista Energy. Its stock outperformed most Argentinean equities in 2022 and 2023. Simply, its performance was not tied to the Argentine economy but to the global energy market and company-specific factors.

In summary, the most efficient way to be exposed to economic shifts is to invest in banks. State-owned energy and utility companies are the next best option. Miners, drillers, and explorers are not perfect because their performance is a function, first, of the prices of the extracted commodities and the company’s idiosyncratic variables. A country’s economic performance is not the most important factor most of the time.

Colombian equities are cheap, but how exactly? Look at the Ecopetrol percentile rank.

EC falls in the bottom percentiles across all three categories: 20Y history, Global Energy, and Global Equities.

What about Colombian banks?

To estimate how cheap are the Colombian banks I picked for reference:

• Banco Marco, Argentina

• Itau Unibanco, Brazil

• JP Morgan, US

CIB and AVAL trade at the lowest P/B multiple. CIB is the most undervalued based on its P/E ratio. AVAL is an exception (for now), commanding the second higher PE in the group.

To recap, our alternatives to invest in Colombia are Grupo Aval, Bancolombia, and Ecopetrol. All three are undervalued compared to their global peers and broad equity markets. But one thing is missing from the puzzle. Despite how cheap and attractive an idea may be, risks are always present.

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Risks

Long Colombia thesis brings four major risks:

• Economic Risk

• Political Risk

• Market Risk

• Company-specific Risk

Economic Risk

The economic risk depends on inflation and interest rates in the mid-term. Inflation has been declining in Colombia for the last quarters.

The interest rates followed. The Central Bank of Colombia projects further interest rate cuts over the next two years. By the end of 2025, the interest rate is forecasted to reach between 7.5% and 7.75%.

So, economic headwinds in the face of tightening liquidity are not in my bingo card for the next 12 months. Of course, this is not to say that the rates cannot increase. The point is that such a scenario falls within the realm of possibility but not probability.

Political Risk

Political risk is a factor to consider. It has two dimensions: foreign relations and internal politics. The importance of the former was reminded in January when Donald Trump announced plans to impose a 25% tariff on all Colombian imports, including coffee, in response to Colombia's initial refusal to accept U.S. military flights carrying deported migrants. This decision was later rescinded after Colombia agreed to accept the deportees.

The tariffs would have significantly impacted coffee prices, as Colombia is the second-largest supplier of coffee to the US, accounting for approximately 20% of imports. However, there is no mention of specific tariffs on Colombian coal in these reports. The focus has been on coffee, flowers, and other key exports, such as petroleum.

Now, let’s discuss internal politics. The country is experiencing heightened political volatility as the 2026 presidential election approaches, with new candidacies emerging and shifts in congressional leadership posing challenges for the Petro administration. Gustavo Petro's "Total Peace" strategy, aimed at negotiating ceasefires with armed groups, has shown limited success, with violence persisting and armed groups consolidating power.

Security concerns are exacerbated by escalating conflicts between groups like the ELN and FARC dissidents, leading to deepening unrest in some regions. This instability, combined with corruption scandals affecting Petro's inner circle, has eroded public support and investor confidence. Additionally, Colombia's relations with international partners, particularly the U.S., are strained due to disagreements over security and drug policies.

A reminder: when the perceived political risk is at its peak, the downside risk for investors is at a minimum. Hence, the risk-reward is at its maximum.

Market risk

Below is a quote from the report on Brazil about market risk:

The bears are around the corner, trying to catch their share of the pie. It will be a challenging year for mainstream investors. Volatility has reclaimed the throne. Even if we remain in a bull market, the corrections will be severe.

Actually, there is nothing new for investors in emerging markets. They thrive in a turbulent environment. The goal is to harness volatility in your favor rather than becoming its victim.

If my thesis based on the Core to Periphery concept plays out, the capital will flow from MAG7/S&P500 to EMs and old economy businesses. In other words, broad indices may suffer a steeper correction while EMs and Brazil experience a bull run.

That statement is fully valid for Colombian equities.

Company-specific risks

Thus, the number of options is limited to two banks and an energy giant, and the risk discussion is limited to AVAL, CIB, and EC.

Colombian banks are doing well, considering their balance sheet composition, Basel III metrics, and performance.

At lower interest rates, banks' revenue structure shifts from growing NIM and fewer customers to decreasing NIM and more customers. In other words, when capital is cheaper, banks earn less interest per customer but have more interest-paying customers. CIB and AVAL keep stable capital ratios and maintain adequate returns. This demonstrates the resilience of Colombian banks.

Ecopetrol maintains a healthy balance sheet.

Capital structure is sound, and liquidity is more than sufficient to cover debt obligations. Even at softer oil prices, EC maintains its liquidity and solvency. So, the EC’s company-specific risk is low.

In conclusion, the prime risk for my thesis is political. But this is not a negative thing. Due to political volatility, Colombian equities are significantly undervalued, offering exceptional risk-reward.

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Conclusion

Which is the next Argentina? It is Colombia. It is one of the most undervalued global markets.

A shortcoming is the limited number of stocks available at US exchanges. Nevertheless, the big three, AVAL, CIB, and EC, are good enough to gain exposure to the rising Colombian equity market. The next presidential elections are on March 8, 2026. So, the next 12 months provide sufficient time to build a position in Colombian equities.

Position accordingly.

PS: such reports are paywalled. Thematic quarterly issues are available exclusively to Pro members. On the other hand, Colombia is one of my favorite picks for 2025-2026, so I decided to make that article freely available.

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On the markets, we are wrong until proven otherwise. So, take the above thoughts with a grain of salt.

Everything described in this report has been created for educational purposes only. It does not constitute advice, recommendation, or counsel for investing in securities.

The opinions expressed in such publications are those of the author and are subject to change without notice. You are advised to do your own research and discuss your investments with financial advisers to understand whether any investment suits your needs and goals.