The Colombian Stock Exchange (Bolsa de Valores de Colombia, BVC) was created in 2001 by merging the three independent stock exchanges that had been operating simultaneously since 1983. Market capitalisation increased consistently after its creation – helped by several state-owned companies going public – before reaching an all-time high of 70.9% of GDP in 2012; the steep drop in oil prices explains part of its recent decline. According to the World Bank, Colombia’s market capitalisation of 29.4% of GDP in 2015 was among the strongest in the region, but below the 42.8% average of Brazil, Chile, Mexico and Peru. Market capitalisation by the end of 2016 was COP311.4tn ($93.4bn), an estimated 36.1% of GDP.
Background
Average monthly traded volume was COP2.9tn ($870m) in 2016, although it has declined from its peak of COP3.9tn ($1.2bn) in 2012. Since 2012 foreign investors have become the most active in terms of traded volume, according to the Colombian Capitalisation Index (COLCAP), with a 25% share in 2016. Meanwhile, pension funds, the largest local institutional investors, have reduced their share since 2011, dropping to 12.5% in 2016.
The BVC is also part of the Latin American Integrated Market (Mercado Integrado Latinoamericano, MILA), which was first set up in 2011 along with the stock exchanges of Chile and Peru. With the integration of the Mexican stock exchange in 2014, MILA became Latin America’s largest stock exchange, surpassing Brazil’s and totalling market capitalisation of around $800bn in 2016. However, the local equity market is still small relative to global standards, and some progress is required to address issues such as low liquidity, low trading volumes, high ownership concentration and market access restrictions.
Economic conditions remain challenging for Colombia in 2017 as output continues to adjust to lower commodity prices. Meanwhile, heightened uncertainty of global policy may be a source of financial risk aversion that could cause bouts of volatility in the local equity market. However, equity prices may benefit moderately from a positive outlook on oil prices, a decline in inflation and local interest rates, an improved medium-term economic outlook due to the peace deal with the FARC, the construction of the fourth generation road infrastructure programme and the implementation of a corporate-friendly tax reform that was approved late in 2016.
Projection
On the volume front, improved valuations and increased capitalisation needs should trigger equity issuances from 2018 onwards. In particular, supply by financial institutions – which have the largest share in the COLCAP – is likely to increase to meet stricter local capital requirements after 2017, as new issuances of subordinate bonds will no longer be included as regulatory capital.
Other variables that may influence the stock market’s performance in the following years include the introduction of standardised stock options, the possibility of trading MILA stocks directly and the effects of the recent tax reform. The introduction of standardised options should facilitate the implementation of hedging and speculation strategies, thus increasing the number and type of market participants. In the future MILA’s role could increase with the implementation of several initiatives being discussed, such as allowing simultaneous initial public offerings, incorporating BOVESPA (Brazil’s stock exchange) and allowing institutional investment flows.
The effect on market capitalisation from the 2016 tax reform should be increasingly positive in coming years, due to an improved sovereign credit outlook, higher expected profits resulting from lower income taxes, new investment incentives such as full value-added tax deductions on purchases of capital goods, and a simplified tax code. These effects should offset the implications of the new tax on dividend payments made to individuals and non-residents.
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