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South America, broadly speaking, is a dichotomy for investors.
On one hand, the continent's history is hard to forget. The Argentine currency crisis and Colombia's reputation for nefarious exports are just two black marks on South America's past. A third is a rap sheet littered with leftist, socialist governments with penchants for chasing away foreign investment.
On the other hand, South America has offered investors some spectacular returns in recent years – and not all of those returns are attributable to Brazil.
Brazil grabs much of the attention paid to the Latin American investment thesis because it is the region's largest economy, but there are other countries there with stories worth listening to.
Colombia and Peru stand as two examples of South American countries that are not only easily accessible for U.S. investors, but also offer the potential for some pleasant surprises.
For example, since the market bottom in 2009, the Global X FTSE Colombia 20 ETF (NYSE: GXG) is one of the best-performing exchange-traded funds (ETFs) of any kind. Over the past decade, Colombia has worked hard to shed its image as the cocaine capital of the world. These days, the country is known as a growing oil producer, among other favorable traits, and one of the more open, progressive nations in the region.
However, there's another country that tells South America's best story.
Investing in Chile: Dependable and Safe
Comparatively speaking, those are two words that can be applied to Chile.
Chile is often overlooked when it comes to Latin American investment options. That is certainly the case when comparing the country to Brazil and Mexico, so it is not surprising that some of Chile's positive attributes go unheralded.
Many foreigners do not even know that Chile has a $15 billion sovereign wealth fund. That may not seem like much to Americans, but the sovereign wealth fund provides an under-appreciated backstop for the Chilean economy.
Should the Chilean economy suddenly turn for the worse, the government can top the sovereign wealth fund as an act of stimulus. That is a healthier means of treating an economic cold than is quantitative easing because it keeps the printing presses turned off.
Another aspect to Chile that a lot of folks sleep on is the country's banking sector.
Arguably, Chile has the most vibrant financial services in Latin America. Chilean banks are highly profitable and well-regulated, even without the government taking a heavy-handed approach to the banks' day-to-day operations.
The antithesis of major U.S. banks? Perhaps.
Banks such as Banco Santander Chile (NYSE ADR: BSAC) and Banco de Chile (NYSE ADR: BCH) are well-capitalized and less controversial than U.S. equivalents. Not only that, but Chilean banks have delivered superior capital and dividend growth in recent years.
Chile also is the world's largest copper-producing nation. By virtue of its copper production, investors assume Chile's market will correlate with China's, the world's largest copper consumer.
In reality, there is little correlation between the iShares MSCI Chile Investable Market Index Fund (NYSE: ECH) and the iShares FTSE China 25 Index Fund (NYSE: FXI). Over the past five years, FXI has been dreadful with a loss of 41.5%, but ECH is up 26.3% over the same time.
While it is constructive for the Chilean economy to see robust copper demand from China, the Asian powerhouse is not the lone determining factor in Chile's bull case.
Plus, Chile's copper connection means it'll profit from recent global central bank stimulus measures.
"Commodity-related economies in well-run countries – such as Colombia, Canada, and Chile – will do well," said Money Morning's Global Investing Strategist Martin Hutchinson.
How to Profit from Chile's Story
There is another factor that bodes well for Chile's overall economic health. Fortunately, there is also a way to profit from this scenario.
It's something U.S. companies and local governments could learn from: Chilean firms do not pay pensions and the government does so on a very limited basis.
This forces Chileans to save and invest rather than relying on the generosity of their employers and government. Not a bad thing at all.
And the average Chilean does have the opportunity to invest in private pensions. Those plans are administered by a small number of companies, one of which is Administradora de Fondos de Pensiones Provida (NYSE ADR: PVD).
Call PVD a bank, call it an asset management company – whatever you name it, it is still a better value than the equivalent U.S. firm.
PVD has no debt and a return on equity north of 30%. The company has the potential to make income investors salivate with a dividend yield of 8.7%.
The banking sector, the sovereign wealth fund and stocks such as PVD serve as examples of what the so-called experts ignore when it comes to Chile. Maybe they are too busy clamoring about the copper story for the umpteenth time.
Do not fall for this antiquated view. See Chile for it is and that is a better, more conservative and safer alternative than most of its Latin American peers.
"In a world in which China and India have 2.5 billion people, an increasing number of whom are fully engaged in the world economy, natural resources look to me a better bet for development than cheap labor, so Chile is still my favorite emerging market," said Money Morning's Hutchinson.
Related Articles and News:
- Money Morning:
It's Time to Invest in Chile and Colombia – Latin America's Reigning 'Good Guys'
- Money Morning:
Chile: The One Emerging Market That Investors Can't Afford to Ignore in 2011
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