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For decades, investors with an interest in Latin America were essentially limited to two choices: Invest in countries that were moderately badly run; or invest in countries that were truly dreadfully run.
Most recently, it's been the "dreadfully run" group that seems to be attracting new members: Bolivia, Ecuador and Nicaragua have subscribed to the economic and political doctrines of Hugo Chavez's Venezuela.
However, two elections this year have created a new category of Latin American country - the "truly well run" class - and installed the first two members: Chile and Colombia. As investors, we should rejoice, make them part of our portfolio, and keep an eagle eye out for other countries that may join this promising new category - the "good guys."
A Foundation of Failure
Latin America's traditional lousy government was due to a number of factors. The legacy of Spanish colonialism lacked the free-market focus that was a British legacy in North America. The Continent retained a tradition of government activism and corruption that has proved hugely damaging for Latin America.
Then there was the curse of natural resources: It was always impossible to establish an internationally viable industrial sector when abundant (albeit cyclical) resource income pushed exchange rates up too far. During the 1945 to 1980 period, the World Bank pushed policies of import substitution that made no economic sense, and encouraged the countries to run up debt. Only in the 1980s - when the international capital markets opened again to equity investments even as debt was cut off by the Latin American debt crisis - did economic policy in a few countries begin to improve.
A Rebound Pioneer
Chile has been a pioneer in that improvement. The dictator Augusto Pinochet, who served from 1973-1990, established free-market norm, reduced the size of the state, and privatized the pension provision, for example.
When Pinochet left power, his democratic successors retained enough of his policies to ensure that Chile never built up much public spending or foreign debt. Consequently when the downturn arrived in 2008-2009, Chile had a $19 billion trust fund - saved from the proceeds of copper sales - that it was able to spend on social programs.
The bottom line: Even during this period, Chile was better run than most of Latin America.
Since 2000, a stretch during which Chile was governed by the left, economic growth had been somewhat sluggish.
This January, billionaire businessman Sebastián Piñera was elected as the new president of Chile, making him the first right-of-center leader since Pinochet. Piñera has promised to increase the pace of economic growth by freeing up regulation and cutting taxes on business. The February earthquake has slowed the implementation of more free-market policies, but has not halted it.
Chile is a major producer of agricultural products and a number of commodities, particularly copper. That's an advantage in today's global economy, where rapid Asian growth has raised the value of commodities worldwide.
With a relatively small government and ample foreign-exchange reserves, the Chilean market should be an essential, albeit modest, part of any international investor's portfolio, even at its current Price/Earnings (P/E) ratio of 19.3.
And Chile no longer stands alone.
The Newest Convert
If we take another, closer look at Latin America, we discover that Colombia is the newest convert to the school of shrewd government. The country has had a drug-and-terrorist problem for 30 years, and before that it endured a civil war.
However, Colombia President Alvaro Uribe, in office since 2002, has greatly alleviated the security problem, although he has not solved it. Between 2002 and 2009, Colombia saw homicides decrease by 45%, kidnappings by 92%, terrorist attacks by 71%, and attacks on the country's infrastructure by 83%, the U.S. State Department reports.
The Supreme Court declared in February that Uribe could not succeed himself, so Defense Minister Juan Manuel Santos ran as his designated successor. Santos was opposed by Antanas Mockus, a populist former Mayor of Bogotá . But after an opinion-poll scare in mid-campaign, Santos was elected on June 20 with 69% of the vote.
Santos has degrees in economics from London and an MBA from Harvard, and has promised to continue improving the security situation - understanding that he has to do so if Colombia's appalling poverty is to be alleviated. (Poverty problems are best addressed by foreign investment in high-employment manufacturing and service sectors; this can only happen if the security situation is tolerable.)
Colombia is rich in natural resources - with oil production currently increasing rapidly - although the country also has a vibrant agricultural sector.
The Economist's forecasters are more pessimistic about Colombia, estimating growth of only 2.4% in 2010 and 3.8% in 2011. Once again, however, those projections really appear to be low, especially if a new U.S. Congress in 2011 finally ratifies the U.S./Colombia trade treaty, signed in November 2006, and never ratified.
Colombia is still at an earlier stage than Chile in its economic development, with a per-capita GDP of $9,200 at purchasing power parity, compared with Chile's $14,700. However, it is geographically better located, closer to major markets, and thus has considerable upside potential. There is not much we can invest in yet, but a modest purchase would seem attractive.
Two Stocks to Study Now
The media enjoys stories of the bombastic Venezuelan strongman Hugo Chavez, together with his followers Evo Morales of Bolivia and Rafael Correa of Ecuador. The corrupt and inept Kirchner regime in Argentina also gets substantial press.
Nobody with any sense would invest in any of those countries.
Colombia and Chile, however, are a very different matter, well worth our attention, and will perhaps provide models for the remainder of the continent. Even the vaunted "BRIC" emerging market - Brazil - let alone the large and highly corrupt Mexico, could learn a huge amount from their example.
When it comes to investing, a country is no different than a corporation: We always want to back good management. Therefore, for our Latin American investments, I recommend Colombia and Chile - both countries clearly possess the strong management that we seek.
There are only two Colombian shares with full American Depository Receipts (ADRs) on the New York Stock Exchange. Of the two, Ecopetrol SA (NYSE ADR: EC) is the more interesting. This oil-and-natural-gas player is participating fully in the expansion of the Colombian oil sector, where May production rose 19% on a year-over-year basis. It's trading at 22 times earnings, but only 13.5 times forecast 2011 earnings, and features a juicy 4.2% dividend yield.
In Chile, I like Vina Concha y Toro SA (NYSE ADR: VCO), a producer of very-high-quality wine. It's currently trading at 20 times earnings, with a dividend of 4.3%. That's a somewhat premium valuation, but I like the dividend and Vina Concha is unquestionably a premium company.
Investing in Latin America has always been a high-risk proposition.
But in Colombia and Chile, it has recently become much less so.
[Editor's Note: Money Morning readers are often amazed by Martin Hutchinson's profit-focused instincts - as evidenced by his unerring ability to paint a picture of what's to come. He's able to show us the big profit opportunities that are still over the horizon - while also warning us about the potentially ruinous pitfalls hidden just around the corner.
So it's no surprise that Hutchinson has pulled off a string of forecasting successes in the face of the worst financial crisis since the Great Depression - a financial crisis that, not surprisingly, Hutchinson is widely credited for having predicted and warned about well ahead of time.
For those who aren't regular readers, and who might like an additional illustration of Hutchinson's abilities, consider dividends and gold, the perpetual safe-havens for the ultra-conservative-investing set.
With his "Alpha Bulldog" investing strategy - the crux of his Permanent Wealth Investor advisory service - Hutchinson has managed to combine dividends, gold and growth into a winning, but low-risk formula that has developed eye-popping returns for subscribers. For more information, please click here.]
News and Related Story Links:
- The Permanent Wealth Investor:
Overview - Money Morning News Archive:
Articles by Martin Hutchinson - The World Bank:
Official Web Site - Wikipedia:
The Latin American Debt Crisis - Money Morning Special Investment Research Report:
The Three Markets You Can't Afford to Ignore - Wikipedia:
Augusto Pinochet - Money Morning Special Report:
Four Ways to Profit From the World's Shrewdest Government
- Wikipedia:
Sebastián Piñera - Wikipedia:
Alvaro Uribe - U.S. State Department:
Profile of Colombia - Office of the U.S. Trade Representative:
United States and Colombia Conclude Free Trade Agreement - Office of the U.S. Trade Representative:
Colombia FTA Pending Congressional Approval
where is the july issue???
I agree with your assessment but how about Peru?
Yes, I agree what about Peru? not only cooper but a wide range of minerals, fishing, growing agriculture, steady growth and not surprisingly one of the countries the chinese pm visited the past year.
I would enjoy seeing your thoughts on Peru as you may know it has also been a bright spot on the economic scene. Although there are serious poverty problems the country is building infrastructure and addressing problems as fast as possible.
I am English and have lived in Chile since 1964, so I knew exactly what was happening in this country during all those years. To start with A. Pinochet was certainly not a dictator and the armed forces saved the country from the local communist takeover. If it hadn´t been for these patriotic men both inside and outside of the armed forces, today Chile would be a carbon copy of Cuba. This is the truth.
Pinochet today is considered a shame even for the peoplewho w in the governmet with him . Chlean poliicians have been honest through the time the only exception was Agugusto Pinochet, with a fake identity using the name of Augusto Lopez opened an account in the Brigs Bank with money he stole from Chile. He was a a dictator and ordered to kill many persons who were in the political field with different opinions he organized a plot to kill Letelier in Washington and General Prats in Argentina… and in Chile thousands wer killed or pt in prison.The chileans today we are happy to have had presidets like : Awyn. Frei. Lagos, Bachelet and now Piñera. The era of darknes is gone
I would have also included Peru in your article as it experiences economic growth for the past seven years. This country has signed a FTA with the US which so far has not been signed with Colombia. The GDP forecast for the current year is around 8% which is impressive considering the current world scenario. Almost no inflation and abundance of resources which Chile does not have. Would be convenient to take a closer look at the ETF EPU on the NY Stock Exchange Mkt. Foreign investment is welcome and politically it is stabilized for the past 20 years.
Ammazing to see how international pirats, as most of your readers are, unmask themselves to show the real colour they are made of: fascism. How anybody can prented that the Pinochet dictatorship was good for the Chilean people, unless his/her mind is blinded by the ultra-fascist; bloody-pirat; internacional robbers ideology. Of course Pinochet was good for financial speculators. Pinochet, under the excuse of "bringing order to caos" robbed more than 100 millions from the country treasury.
Agree with the "British lady" that -the new president- Pinera will do as Pinochet did. Pinera is a thief that robbed -coincidentaly- over 100 millions from the Bank of Talka, when he was it CEO. Sending to ruin investors, depositors, and thounsands of little people that trusted that prestigious institutions for years, before Pinera was hired to run it. The only reason he went "Scott-free" was because he was a Pinochet protege, and charges were withdrawn from the Courts of Law. Two thieves, murderes, violators of women and children, torturers… Are those really your heroes? Wooow…! Greed is rotting your hearts. You'll have to explaint your actions to your Gods (If you, ever, have the conscience to believe in one).
Uribe, is a narco-traficant -well know by everyone in Colombia and abroad. As Noriega was in panama (allowed to be by the CIA, untill it was no more useful: he knew to much, he has to be taken down, even if the cost was more that 4,000 Panamenians lives (who cares… my greed first…). The Colombia's "new president" is the major murderer of union leaders and responsible for the "positive-false" strategy to show "real" progress in the war that the Colombian government have declared against its own people -to create the conditions for speculators -as you- to "invest" (means: loot, rob, reap, pollute,et cetera).
I know this note shall not be published by you. Just, before your time is up, somebody has to tell you that you're just SCUM. Take that word to your "Creator" before you knock Heaven's gates. Let Him to decide. I'm just reminding you, here on Hearth, what putrefaction you are.
Gabriel.
The ignorance is bold, if you don´t know about the recent history of Colombia, please, don´t talk about a problem you don´t even know… Let me tell that before Uribe, the country was close to be considered as a failed state, the guerrilla was close to the most importants cities of the country. They kidnaped people eveywhere… the bombs explote everywhere, you couldn´t go out of the cities. The inflation was high, the economy didn´t grow as they do today…
Now the reality it´s different, we are free to go anywhere we want, we´re considered as a CIVETS, and situation in the country are getting better.
Santos is not a morder, come on, they discovered the pasitive-false, a technique used a long time a go, he didn´t invented, he tried to ended, and i´m absolutely short that things in Colombia will be better in four years than today.
Be short that Colombia never is going to be like Venezuela, or Cuba, if that is what you want… keep dreeming, look the situation in those countries… it´s a shame what is hapening with our brother from Venezuela..
In January this year (shortly before the Chilean election and earthquake), my wife and I visited the Concha y Toro winery south of Santiago. We were favorably impressed with not just the wine, but also the professionalism and efficiency with which the operation seemed to function.
In Bolivia the president requires mining companies to provide for the local people with what is called a socialisation program. One gold company that I am following is providing medical nursing, teaching and later dammed water and electricity. To me this is a win, win, win situation. It is a win for the local people, a win for the government and win a for the gold company. Development of Bolivia's mineral wealth is a three way partnership that is also providing employment for the local people.
If the good guys are still connected to Wall Street then I will stay with the bad guys.
However, Colombia President Alvaro Uribe, in office since 2002, has greatly alleviated the security problem, although he has not solved it. Between 2002 and 2009, Colombia saw homicides decrease by 45%, kidnappings by 92%, terrorist attacks by 71%, and attacks on the country's infrastructure by 83%, the U.S. State Department reports.
Those statistics alone tell the whole story. Colombia has never been as secure as it is now. This has prompted investors to jump in and harvest the raw materials that abound in this natural resourse rich area of the world. you can read more on Colombia at our blog ColombiaBogota.org
After reading Gabriel and other people comments it is easy to conclude who loves Colombia and who not; who sees the half full bottle and who doesn't like to see more than his or her own misery, his or her own rotten mind and soul. Some who dare to say they have seen Abel killing Cain and that the history has been doctored….
Fortunately Colombia and Chile are turning the economical ground that will reject any revolutionary intent as certain pretended good neighbors have attempted
I'd like to see cases in which corruption has been damaging to investment in Mexico, according to your experience. Given your statement of "large and highly corrupt Mexico", and your recommendations about Colombia and Chile, seems to me that you're implying that Colombia is better run and less corrupt than Mexico, and I certainly believe that is not the case.
[…] You to Spend? July 10, 2010Ignore the "Experts": 7 Reasons Not to Invest in Japan June 30, 2010It's Time to Invest in Chile and Colombia – Latin America's Reigning 'Good Guys' July 6, 2010History Shows Stock Market Plunge May Just Be Par for the […]
I didn't expect your "investors" and "advisors" to know much about the reality of Latin America, but it is disappointing how little they really know. Maybe it doesn't matter to them that the United States government and US corporations, along with their puppet generals, have been involved in overthrowing democratically elected governments and murdering thousands, but it should matter to people of conscience and those who are concerned about more than just THE BOTTOM LINE ! In supposedly "democratic" countries like Colombia and Honduras, journalists, union organizers and members of the opposition are still murdered frequently, and it's naive to think that those governments have no role in this selective repression.
There are too many inaccuracies and contradictions in your article for me to refute in a short space here, but regarding Chile, remember that the surplus from copper that you mentioned should not have been credited to Pinochet and his butchers, but rather to the fact that the Chilean Congress NATIONALIZED country's copper during the Allende years.
The next time you go to Latin America, stay away from the wine and cheese(or empanada) tourist traps and get to know folks who are trying to live on a couple of hundred dollars a
month. It could be enlightening. Thank you.
yo quiero saver que hora es en colombia son las 7 am que hora es en japon
[…] from its advance, and so will the iShares MSCI Chile Investable Market Index fund (NYSE: ECH), as copper mining makes up a large part of the Chilean economy. ECH hit an all-time high last week. [Editor's Note: Money Morning Contributing Writer Jon D. […]
[…] touch Venezuela or Argentina. And in Brazil I'd wait until after the October election. But the prospects for Chile and Colombia – and maybe even Peru – look […]
Ana, even you don't believe it. Colombia has done big efforts in the last decade (and Mexico falling), and according to the newest Transparency International Corruption Index from 2010, it's less corrupt than Mexico. Colombia is ranked 78 and Mexico 98 (whereas higher ranked = less corrupt).
Of course none of them can match Chile's current position there, Chile (21) is even rated less corrupt then the USA (22) and many other states of the European Union like Belgium (22), France (25). Spain (30), Portugal (32) and of course and self explanatory, Berlusconi's Italia (67)
Check out transparency.org
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