Beat the BRICS: The Three Latin America Markets You Can’t Afford to Ignore

[Editor's Note: Late last year, global investing expert Martin Hutchinson warned investors that the fortunes of the so-called "BRIC" nation of Brazil were fading. In today's commentary and analysis, Hutchinson provides readers with three alluring alternatives - and offers a profit play from each one.]

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The stock exchanges of Colombia, Peru and Chile agreed last November to merge their trading, giving international investors access to roughly 600 stocks – more than any single country in Latin America.

Earlier this month, the trio demonstrated just how serious they were, with the Peruvian and Colombian stock exchanges entering into a full-blown merger agreement. These are the three best-run countries in Latin America, with a combined gross domestic product (GDP) of more than $500 billion.

If they get their act together, it'll be these three countries – and not Brazil, that much-ballyhooed "BRIC" country – that are the "must-have" havens for our money.

Let me show you why…


Global Investing Intelligence

As Money Morning readers well know, I have recommended Chile a number of times. And with good reason: In this period of high commodities prices, I continue to believe that this is the most attractive of all emerging markets.

And Colombia and Peru share many of Chile's strengths. Both countries have benefited enormously from the zooming surge in commodities and energy prices.

Peru is a commodities bonanza, with major potential in everything from gold to fish. Colombia, on the other hand, is already a significant oil exporter. And in recent years the country has caused the curve of its oil production to turn sharply upward – it produced about 760,000 barrels a day in 2010, and production is increasing at about 10% annually.

Each of the three countries is larger than any country in the European Union (EU), but their total population is relatively modest at 92 million. Total GDP was $528 million in 2009, but growth is rapid: Colombia grew at 4.4% in 2010, Chile at 5.1% and Peru at an extraordinary 8.7%. While all three countries have excellent relations with the United States (Chile has a free-trade agreement and Colombia has negotiated one subject to ratification by the U.S. Congress).

Also worth noting: China is active as an investor in all three countries, especially Peru.

The real secret to the success of these three countries is that they are competently run and have kept their public sectors under control. Chile, for example, has a public sector (as a share of GDP) that's about half the size of Brazil.

The three countries adopted their current free-market philosophies after traveling admittedly different routes.

Chile established free-market institutions under the dictatorship of late President Augusto José Ramón Pinochet, who took advisers from the University of Chicago. Peru got the free-market religion in the 1990s, after a period of socialism had run the economy into the ground. And Colombia, while subject to high levels of armed conflict, has always been primarily free-market in orientation.

The fact that these three countries each have a predominantly free-market outlook enables them to work together – even as neighboring countries such as Venezuela, Bolivia and Ecuador have relapsed into socialism and increasing poverty.

The big question for investors is whether the countries' free-market orientation will be maintained. The outlook is the most solid in Chile, where the social democrat government that left office in March 2010 was quite market oriented, and the new government of President Sebastian Piñera is even more so.

In Colombia, a free-market government led by Alvaro Uribe has been replaced by another free market government led by Juan Manuel Santos, in office until 2014.

In Peru, the outlook was cloudy at the time of the last election in 2006. But the prosperity that the country has seen since then has improved matters. Three of the four leading candidates for the April 2011 presidential election are free market in outlook; should one of these candidates win, the collaboration with Colombia and Chile can be expected to continue.

The main gain for the three countries from working together is the ability to achieve economic scale.

"MIST" Opportunities

Jim O'Neill, the head of asset management at Goldman Sachs Group Inc. (NYSE: GS), who coined the BRIC acronym in 2001, recently coined another acronym: "MIST," for Mexico, Indonesia, South Korea and Turkey. To create the MIST list, he included countries that he considered to be both "growth markets," and large enough, with output above 1% of gross world product (GWP), to have the "scale" to interest the largest companies and institutions.

Combined, Colombia, Chile and Peru have GDP of about 1% of the world's total, so if they can persuade investors that they really do represent a single bloc, they will attract a renewed flow of both direct investment by big companies and portfolio investments by the largest institutions.

The stock market merger that I outlined above is the first – and easiest – way for them to cooperate. And it should bring in a flood of new money once it's completed.

Currently, while mining companies will invest in the three countries to sell to world markets, manufacturing companies are less interested because local markets are so small and inefficiencies are inevitable. If, over the long term, the countries could form an actual "common market," their economies and living standards would benefit enormously.

In the short term, even without further integration, all three countries have excellent growth prospects. U.S. individual investors wishing to venture there will find a limited selection (though Chile has a dozen U.S.-listed companies).

For me, these three guys beat the much-hyped BRIC (Brazil) hands down.

There's a lesson to be learned here: Better management wins for countries, as well as for companies.

Actions to Take: The stock exchanges of Colombia, Peru and Chile agreed last November to merge their trading, a move that will provide global investors with access to more stocks than any single country in Latin America.

If they get their act together, it'll be Colombia, Peru and Chile that become the next "must-have" havens for our money in Latin America.

And here's the best point of all: You don't have to wait until this merger is finished to profit from the powerful trends I've described – you can invest in each of the countries on an individual basis right now – putting yourself ahead of the masses that are certain to rush in once the market merger is completed.

To do that, take a look at the following three profit plays:

  • The iShares MSCI Chile Investable Market Index Fund (NYSE: ECH), an exchange-traded fund (ETF) that gives you broad exposure to the MSCI Chile Index. At $950 million, this ETF is large enough to be efficient. But it is a tad expensive, given that it's trading at a current Price/Earnings (P/E) ratio of 28.
  • Ecopetrol SA (NYSE ADR: EC), Colombia's principal oil company, responsible for about half of that country's rapidly expanding oil output. Again, it's a bit expensive, with a P/E of 30 on trailing earnings. But it's trading at only 16 times forward earnings for 2011. And it pays a 2.8% dividend.
  • Companhia de Minas Buenaventura SA (NYSE ADR: BVN), Peru's largest precious-metals-mining company, which also mines lead, zinc and copper. This ADR trades at 16 times trailing earnings and only 11 times prospective earnings and pays a modest dividend.

[Editor's Note: As our continued coverage of the run-up on commodities prices (which Martin Hutchinson mentioned several times in today's column) underscores, U.S. consumers can essentially count on seeing $150-a-barrel oil - perhaps as soon as mid-summer. A price increase of that magnitude could result in $5 a gallon gasoline. But here's the thing ...

You don't have to be a victim.

If you follow our lead, you'll be among the small group of investors who make a great deal of money in the crude-oil market this year. You'll have to learn the "new lay of the land," and learn to invest wisely in the face of potential whipsaw volatility. But a balanced approach of exchange-traded funds (ETFs) and individual company shares will enable you to navigate this storm - to find the welcome port on the other side.

To find out more about this opportunity, check out the "2011 Investor's Forecast" issue published by our monthly affiliate newsletter, The Money Map Report. The article, titled "$150 Oil: It's Coming. So Here's How to Make the Most Money," was written by global-energy guru Dr. Kent Moors, and contains a number of specific stock and ETF recommendations.

If you are already an MMRsubscriber, you already have this issue in hand, and can access this report by Dr. Moors by clicking here and then using your password. The article begins on Page 11 of the "Forecast" issue.

Money Morningreaders who are interested in finding out more about our forecast issue can do so by clicking here.

Look at it this way: With oil at $150 a barrel and gasoline at better than $5 a gallon, the profit potential is immense. Just one winning profit play will offset the cost of the subscription - many times over.]

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Join the conversation. Click here to jump to comments…

  1. Mac Henry | February 1, 2011

    Excellent Article Martin, I agree with you on the outlook of those countries and we should add Pacific Rubiales Energy (PRE) on that list, a company in Colombia with headquaters in Toronto which is already doing big things and will continue to do so. It trades in the Toronto Stock Exchange.

  2. John Conlisk | February 1, 2011

    For GDP of the three countries, should that be "$528 billion" not million?

  3. IPINLive | February 1, 2011

    Whilst I will agree with the fact that Chile has potential, when taken into context and timeline, O'Neil was still correct with his predictions at the time. Brazil is now creeping past the point of an emerging economy. If you had invested in Chile when the BRICS report came out, you would not have seen the performance that Brazil did.

  4. James Johnson | February 1, 2011

    While talking to my Chilean cardiologist about Brazilian growth, he said "Brazil is the country of tomorrow, and always will be".

  5. Gary | February 4, 2011

    Colombia? That place is a dirty hell-hole with an horrendous human-rights record, full of drug dealers and drug addicts. Its only a nice place if you are rich.
    BTW Did the University of Chicago advise the psychopath Pinochet on genital torture, execution, or was it an economic essay on thuggery and how to make people disappear? You gloss over Pinochet's crimes, displaying a contempt for humanity.
    Chile's true constitution has not been fully restored, and the gap between rich and poor is still obscene.

  6. kamlesh | February 6, 2011

    THANKS FOR THE UPDATE INFO ON THE EMAIL FROM MONEY MORNING

  7. Weston MacAleer | November 17, 2011

    Appreciate the candor of the comments on Columbia. There are always several perspectives to every situation, which, when expressed, should be encourgaged

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