Colombian stocks soar on higher rates, hopes for market-friendly political shift

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Central bank maintains high interest rates amid global easing cycles

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Upcoming elections could influence monetary policy outlook

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Rally powered by financials and resource-focused names

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Fiscal risks remain despite investor confidence

By Nikhil Sharma

Dec 18 (Reuters) - Colombian stocks and the peso currency have emerged among Latin America's top performers in 2025, bolstered by higher interest rates, attractive valuations and investor expectations of a shift towards an investor-friendly government.

The COLCAP index has surged over 70% in dollar terms year-to-date, marking its strongest annual performance since 2009. In comparison, the broader Latin American equities index climbed 42.6% as investors looked for assets beyond the U.S. dollar, while Brazil's Ibovespa and Mexico's S&P/BMV IPC indexes advanced about 46% and 47.5%, respectively.

The Colombian peso has gained 13.8% this year so far, outperforming several global peers, with market participants attributing its strength to attractive carry trade opportunities given the country's relatively elevated interest rates.

The central bank has maintained its benchmark rate at 9.25% since the last cut in April 2025, citing stubborn inflation and stronger-than-expected growth.

Several investors believe that a right-wing government could replace the current left-wing coalition, noting recent election trends in Argentina and Chile in favor of the right.

"Colombia (assets) rally this year is down to three factors: a starting point of cheap valuation, U.S. dollar weakness, and the expectation of a swing towards more market-friendly government," said Hasnain Malik, EM equity and geopolitics strategist at Tellimer.

ALL EYES ON 2026 ELECTION

Colombians will go to the polls in May to elect Gustavo Petro's successor, as the president is constitutionally barred from seeking re-election. Several months ahead of the vote, contenders are lining up, including leftist Ivan Cepeda and conservative Paloma Valencia, with early polls showing no clear frontrunner.

"Recent polls suggest the country could move toward a more pro-investment and pragmatic administration. That type of outlook typically supports a stronger appetite for local assets, lower risk premiums, and a more constructive market environment," said David Cubides, chief economist at Banco de Occidente.

"For investors, the prospect of firmer institutional stability and clearer long-term policy signals has become an important driver of recent performance," he added.

A major headwind for whoever Colombians choose to run the country will be the deteriorating public finances, worsened due to heavy post-pandemic spending. The cash shortage prompted the government to suspend a fiscal rule in June, and the finance ministry raised this year's fiscal deficit target to 7.1% of GDP, from an original 5.1%. Moody's and S&P Global cut Colombia's rating in June, while Fitch did so this week, all citing fiscal issues.

According to analysts at Societe Generale, election results will be pivotal for fiscal and monetary policy outlooks, adding that populist policy choices could further aggravate fiscal vulnerabilities.

"It's been three years of an administration that has lowered expectations for investment and generated some additional attention on the fiscal front, and now we're looking at potential prospects of change," said Alejandro Cuadrado, EM/Latin America strategist and global head of FX at BBVA.

"There are expectations for the pendulum to swing, but limited visibility on that, because of the many candidates that we have in store and very mixed political perspectives and polls."

BLISTERING ASSETS RALLY

In Colombia's COLCAP index, financial stocks, which dominate with 50% of the benchmark's weight, have largely led the rally. Grupo Cibest, a financial heavyweight, has soared 102% in dollar terms this year.

"After decades, Colombia is now seen as a place for investment and growth, and that has translated into the appreciation of the Colombian peso and financial stocks," noted Juan Perez, director of trading at Monex.

Other major domestic stocks have also soared. Colombia's major energy firm, Ecopetrol, rose 23% this year, while conglomerate Grupo Argos - with diversified holdings in cement, energy, and airports - has jumped 86%.

Investors are finding Colombian equity valuations particularly attractive, with the COLCAP's price-to-earnings (P/E) ratio at 7.22, far below the S&P 500's 27.88. However, analysts caution that the low ratio reflects ongoing political and fiscal risks.

"We met with several Colombian companies over the past two months that signaled their intent to increase domestic capex for the first time since President Petro took office, which is a step-change from the past several years," said Paul Dmitriev, senior analyst at Global X.

Renzo Merino, vice president at Moody's, highlighted that investor sentiment in Colombia could shift further as elections approach.

"Sentiment had been somewhat negative, but as we come closer to the elections, it seems that sentiment is starting to change now," he said.

(Reporting by Nikhil Sharma, additional reporting by Purvi Agarwal and Twesha Dikhshit; Editing by Maju Samuel)