As the crow flies, it's 4,400 miles from Punta Arenas, Chile,
to Barranquilla, Colombia.
#-ad_banner-#The two cities flank the southern and northern
ends of western South America, and from end to end, you'll find
the most dynamic economies in the Western Hemisphere. And the
remarkable economic strength seen in those countries, in contrast
to the more challenged economies in the eastern part of South
America, explains why you can't simply paint the notion of
emerging markets with a broad brush.
Make no mistake, a rising tide has lifted many boats in South
Brazil has witnessed a remarkable economic renaissance, and is
now the world's seventh-largest economy. To the south, Argentina
remains blessed with an impressive set of natural resources, and
a well-educated middle class. But these countries are also beset
by deep-rooted structural challenges, and are increasingly being
run with a dubious government hand. Investors need to brace for
inflation scares, GDP slumps, social unrest and currency swings,
and the higher risk doesn't necessarily yield greater
Yet if you pivot west, you'll find a completely different
Chile, Peru and Colombia, which are often referred to as the
Andean nations, possess all the key virtues that emerging-market
investors seek: a stable and growing middle class, abundant
natural resources, and most importantly, sound government
policies. It's that second factor -- stable and growing middle
classes -- that really explains the deep appeal of these
They are all charting a path laid out by Japan in the 1960s
and '70s and South Korea in the '80s and '90s: Build a strong
base of industry and banking, and develop a set of policies that
supports domestic economic consumption, thereby setting the stage
for a surge in residential construction, leisure spending, and
auto and home appliance ownership. That creates a virtuous cycle
-- such developed economies need more lawyers, professors,
retailers, and other professionals, who in turn help create
further waves of consumer spending and economic development.
To be sure, with per-capita GDP of around $19,000, Chile is
well down this path. Yet there is still a long runway of growth
ahead. Japan and South Korea, for example, have GDP per capita of
$37,000 and $33,000, respectively, according to the International
Monetary Fund (
To close that gap, Chile is doing what those Asian powerhouses
did in the past: boost infrastructure. While Brazil is beset by
clogged ports, pockmarked roads and a generally stressed
infrastructure, the Chilean government has adeptly used private
capital in tandem with government funds to rapidly improve its
according to the Inter-American Development
Brazil's inflation rate hovers above 6%, thanks to
infrastructure bottlenecks, while Chile's central bank expects
inflation rates to cool from a current 4% to 3% by year's end.
For investors, those comparative inflation rates have a direct
impact on real returns.
Meanwhile, global investors have a chance to invest in Chile
while the chips are down. A slump in
has pushed the
iShares MSCI Chile ETF (NYSE:
38% lower since the start of 2011, compared witha 51% gain for
the S&P 500. Notably, the Chilean economy is less dependent
on resource exports in the past, and this exchange-traded fund (
) reflects the steady expansion in domestic consumption. Consumer
and financial stocks represent roughly 45% of the portfolio,
while utilities account for another 25%.
To Chile's north sits Peru, which is arguably poised for the
region's strongest growth thanks to savvy government policies
that have helped the economy double in size over the past decade,
while pushing inflation below 3%. Peru's population of 30 million
is twice as large as Chile's, though the middle class is only
just starting to expand at a faster pace. Per-capita GDP stands
at $11,000 but is rising quickly.
iShares MSCI All Peru Capped ETF (NYSE:
, like its counterpart in Chile, has slumped badly since the
start of 2011, though it's worth noting that this ETF does have
greater exposure to mining and industrial stocks. Still, it's
hard to ignore the fact the Peruvian economy is expected to grow
in the 5% to 6% range in 2014 and 2015,
according to the IMF
Heading toward the top of the continent, you'll find Colombia,
which may be the most dynamic economy in the whole region. My
, like many other North Americans, has settled into that country,
no doubt lured by a fast-growing economy that was in deep
distress just a decade ago. I share his view: I've visited
Colombia on several occasions over the past five years, and I'm
amazed at the rapid pace of economic development.
That said, the
Global X FTSE Colombia 20 ETF (NYSE:
hasn't endured the sharp pullback seen by the Chilean and
Peruvian funds, and its portfolio isn't quite as inexpensive
based on traditional valuation metrics. Still, Colombia appears
set to greatly benefit from a "peace dividend," as that
country's long-running civil war winds down
, and its middle class gets ready to spend.
Risks to Consider:
The caveat for any emerging markets applies here: These
markets are volatile, can rise or fall at a fast pace and should
never be bought with a short-term time horizon.
Action to Take -->
These three countries are set to feed off each other as rising
middle classes represent a growing target for the biggest
regional companies. As an example, the Falabella retail chain,
which is the second-largest holding in the Chilean ETF, is
rapidly expanding its footprint into Peru and Colombia as well.
These are truly buy-and-hold ETFs. How the underlying economies
perform in 2014 or 2015 is not relevant. Instead, it's the fact
that these countries are on the same wealth-inducing path trod by
Japan and South Korea, which should lead you to expect robust
gains over the course of the next decade.
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