JP Morgan Report Shakes the Stock Market in Colombia

The Colombian Stock Exchange (BVC) experienced a significant drop this week to levels not seen since the worst period of the Covid-19 pandemic three years ago. A report from the global financial services company JP Morgan on the rating of the BVC rattled the Colombian national stock market.

Report Raises Concerns

The ColCap index, which has been called MSCI ColCap since 2021, represents the variation of the 25 most liquid stocks in the Colombian market. On September 5th, the MSCI ColCap fell to 1,051.18 points, marking a 2.45% loss compared to the previous day, September 4th. Such a low value had not been seen in the country since March 2020, when the pandemic emergency was declared.

The following day, September 6th, was even worse, with the index dropping to 1,046 points, a level not seen in 15 years. Although the value has shown some recovery in subsequent days, it remains at extraordinarily low levels.

The reason for the decline was the report from the American company JP Morgan, which stated that the Colombian stock market could be removed from the MSCI emerging markets index and reclassified as a frontier market.

Falling into the frontier market category means moving down a notch in the international market classification, which mainly divides economies into developed and emerging markets. It’s important to note that this is currently just a warning and not a fact; Colombia is still classified as an emerging market.

What the report suggests is that the country could leave the emerging market category and fall to a level below that occupied by economies smaller than emerging markets. This would mean being classified as a more problematic and challenging market, which could potentially deter both domestic and foreign investors.

Frontier Markets

These types of markets have lower liquidity and more risks. In this context, JP Morgan explained in its report what could happen if the Colombian market does not increase its liquidity. It’s worth noting that frontier markets include economies like Morocco, Croatia, or Nigeria.

“We do not see big positive drivers for Colombian equities: an unattractive macroeconomic scenario and an uncertain political landscape keep us on the sidelines. It is mainly in valuations where Colombia stands out, as multiples have significant discounts, but this comes with a weak top-down and weak earnings,” said the report from the American financial institution.

The removal of Ecopetrol from the MSCI index also plays a significant role in this warning report. With Ecopetrol’s departure, only two Colombian companies remain in the index: Bancolombia and Grupo ISA. The MSCI index is an American weighting system for investment funds, debt, stock market indices, hedge funds, and other portfolio analysis tools.

“After the removal of Ecopetrol from the index in November 2022, Colombian stocks are on the verge of breaching the MSCI liquidity threshold, and the index provider could decide to initiate a consultation process for reclassification, which, in our opinion, would further pressure valuations,” warns JP Morgan in reference to the removal of Colombia’s largest company, Ecopetrol, from the MSCI index.

Reasons for Optimism

However, there are also reasons for optimism. The Colombian Stock Exchange is in the process of integrating with Chile and Peru to create a larger market that offers greater benefits to investors. The idea is to attract more capital, not only from the three countries but also from investors in other regions.

According to data from the Ibero-American Federation of Stock Exchanges (FIAB), the Colombian stock exchange ranks fifth in market capitalization among a group of 14 markets, including the Spanish market. The JP Morgan report is just an alert to Colombian authorities, not a reality at this point.

Furthermore, the decision to change the BVC’s index category belongs to MSCI, the entity responsible for managing it.