A Fantastic Ground Floor Opportunity

Investors should be very excited.

Because it's only once in a very long time that investment watersheds like this happen and you can get some long-term positions at stunning bargains.

Last week Mexico, Chile, Colombia and Peru deepened their "Pacific Alliance" by removing tariffs on 90% of the trade between them, beginning July 1.

Now, there have been many such bilateral trade deals, most of them only moderately important at best. But this one is different.

This one marks the emergence of a genuine investment opportunity in Latin America that isn't Brazil and isn't doomed to collapse within a few years.

For anyone looking for alternatives to a U.S. market that looks increasingly pricey and vulnerable – and that should be you, if it isn't already – you can't miss this opportunity.

Free and Brave vs Weak and Scared

Latin America has increasingly separated itself into two groups, those that believe in free markets and those that don't.

On one side you have Venezuela, which runs a socialist state on the back of oil revenues, and Argentina, defaulting on its debt, increasingly impoverished and inclined to nationalize foreign investment. Smaller countries like Bolivia, Ecuador and Nicaragua have joined this group.

Brazil may have looked like a winner in 2007-10 but in reality is solidly also a member of this group since Lula came to power in 2002.

On the other side you have Chile, free market since Augusto Pinochet's 1973-90 dictatorship, but lonely for a long time. More recently, Colombia became a free market under Alvaro Uribe (2002-10) and has more or less continued under Juan Manuel Santos since 2010.

More surprising, Peru's Ollanta Humala had campaigned as a leftist in 2011 but since his election has governed as a moderate free marketer, albeit with a special (and justified) focus on the needs of Peru's indigenous peoples.

Finally Mexico, which had seemed lost to free markets even under the 12-year center-right rule of Vicente Fox and Felipe Calderon, has moved sharply in a free-market direction under its new President Enrique Pena Nieto, even though he's a member of the traditionally obscurantist PRI.

Among them, the four economies have a population of 208 million and a GDP of $2 trillion – both larger than Brazil. In addition, other countries such as Panama and Honduras have applied to join the Pacific Alliance, and I wouldn't mind betting that Paraguay and Uruguay think hard about it, since their own Mercosur alliance isn't going anywhere – it's dominated by Brazil and Argentina and now includes leftist Venezuela.

Pacific to Proactive

The new agreement, signed in Cali, Colombia on May 23, will allow the four countries to increase trade among themselves, currently less than 5% of their total trade, and to use each other's trade treaties to export to third countries.

Chile has a particularly good set of trade treaties and the Colombian newspaper Diario has suggested a list of products such as pineapple products and glassware which Colombia will be able to export to Chile for further processing and re-export to Asia. It doesn't hurt either that Peru, Colombia and Chile have integrated their stock markets and Mexico is working on joining them.

To that end, a great first-stop for investors interested in Chile is AFP Provida SA (NYSE: PVD) the Chilean leader in the management of privatized pension funds, with operations in Ecuador, the Dominican Republic and, most interestingly, Mexico.

It currently trades at only 6.4 times trailing earnings, with a dividend yield of 11.5%, but that partly reflects a bullish 2012 in Chile. Still, it's a very attractive entry in a business that could grow a lot further in the other Alliance countries and elsewhere.

All four countries have decent growth this year, and none of them have major financial problems. Colombia, Peru and Chile are all resource rich, while Mexico is increasingly competitive in manufacturing as Chinese costs rise.

While these four countries may individually be too small to throw their weight about, by integrating their economies they should be able to create a strong bloc that will be highly competitive in world markets.

That's why I like Global X FTSE Colombia 20 ETF (NYSE: GXG). It's the leading ETF for the Colombian market, with investments in the major Colombian companies such as Ecopetrol (NYSE: EC), Pacific Rubiales Energy (OTC: PEGFF), and the banks. This is the simplest way into an attractive market with lots of growth potential.

Of the four stock markets, Chile and Mexico are pricey at close to 20 times earnings, according to the Financial Times, but Colombia at 15 times earnings and Peru at 13 times earnings are more reasonable.

Unfortunately, there is no Pacific Alliance ETF – yet (it seems the ETF designers have missed a trick).

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