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
)) 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 ...
As 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 ((
)), 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.
Jim O'Neill, the head of asset management at Goldman Sachs Group
), 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
There's a lesson to be learned here: Better management wins for
countries, as well as for companies.
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
If they get their act together, it'll be Colombia, Peru and
Chile that become the next "must-have" havens for our money in
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:
iShares MSCI Chile Investable Market Index Fund
), an exchange-traded fund (
) 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.
, 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
Companhia de Minas Buenaventura SA
, 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
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