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

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.