The most unlikely part of the world to thrive in the aftermath of the global financial crisis might be Latin America, a region with a vivid history of economic mismanagement and corruption. Yet, although risks always lurk in this part of the world, Latin American economies and stock markets have outpaced those of Europe and the U.S. in recent years, and prospects for investors are excellent.
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An exchange-traded fund that holds shares of the largest companies in the region, iShares S&P Latin America 40 Index (symbol ILF), returned an annualized 21.7% over the past five years through July 9. (By contrast, the main U.S. benchmark, Standard & Poor's 500-stock index, lost 0.2% annualized.) What's remarkable is that, despite the huge run-up in Latin American share prices, many strong companies in the region are trading at price-earnings ratios in the low teens and less.
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What underlies rising stock prices is strong economic growth. Take Peru, a nation known until fairly recently for poverty, terrorism and incompetent governments. After growing at a brisk 9% in 2007 and 10% in 2008, gross domestic product slowed in 2009, although it still inched ahead by a percentage point. The economy is expected to grow by 6% this year. Inflation remains tame, and the unemployment rate is a good deal lower than in the U.S.
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Peru impressed me during a recent visit with its political stability and entrepreneurial spirit, and it's not alone in the region. The consensus of economists, as reported by The Economist, is that the average GDP of Argentina, Brazil, Chile, Colombia, Mexico and Peru will rise 4.8% in 2010, compared with 3.3% in the U.S., 2.7% in Japan and 1.1% in euro-zone countries.
Central bankers predict that the economy of Brazil, Latin America's largest nation, will grow 7.1% this year, the fastest clip since 1994. Fitch, the rating agency, just raised the country's credit prospects from stable to positive, citing "growth dynamics" and "prudent" policies.
What's happened? First and foremost, leaders who were elected as fire-breathing populists, including Brazil's Luiz Inacio Lula da Silva and Peru's Alan Garcia, have come to realize that their political support depends on prosperity, and they have embraced policies that spur growth.
Brazil's top individual income-tax rate is now just 27.5%, 7.5 percentage points lower than our own. And Peru is tearing down barriers to trade and foreign investment. Just before my arrival, the country opened a $4-billion pipeline and terminal for liquefied natural gas built by a consortium of U.S., Korean and Japanese firms. And nations throughout the region, following Chile's lead, have found that privatized social security systems provide capital and give their citizens security in retirement.
In terms of debt, many Latin American nations are in far better shape than developed economies. Some cut their obligations in good times; today, Peru's debt-to-GDP ratio is below 30% (the ratio in many European nations is three times that level). Other Latin countries were simply unable to borrow at favorable rates because of past imprudence.
Latin America, however, is hardly trouble-free. Venezuela, for example, is a basket case, with its GDP forecast to fall 5.5% in 2010. Led by Hugo Chavez, who has managed to wreck an oil-rich economy, Venezuela is expected to be the worst performer this year among all 57 countries surveyed by The Economist, including Greece. And Argentina still has not repaid all the borrowers it stiffed when it defaulted on its debt nearly ten years ago.
Though the specter of inflation haunts nearly every Latin American nation, for now consumer price increases are under control (except in Venezuela, where they've been rising at an annual rate of more than 30%). Meanwhile, Mexico, Colombia, Peru and other countries are suffering from the scourge of narco-terrorism, and the gap between rich and poor remains wide, creating an environment for social unrest and the potential for a reversion to poor economic policies.
Finally, a large chunk of Latin America's recent success is rooted in historically high prices of commodities such as gold, copper and oil. Resource-based economies are vulnerable to falling commodity prices.
Overall, however, countries such as Brazil and Peru have diversified their economies, adding to their long-term allure. An efficient way to share in the region's growth is by investing in well-run businesses that touch all sectors of the economy.
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An example is América Móvil (AMX), the largest provider of wireless services in the region, serving more than 200 million subscribers in 17 countries. Based in Mexico, the company carries a market value of $100 billion, and its American depositary receipts trade at 13 times estimated 2010 earnings (all of the individual stocks I am citing here trade as ADRs). On average, analysts predict that earnings will rise at an annual rate of 11% over the next three to five years.
Another is Banco Bradesco (BBD), the fast-growing, Brazilian financial-services company that caters to the burgeoning middle class in a nation of nearly 200 million people. The stock, down about 13% since the start of the year, trades at 13 times projected 2010 profits. Analysts expect the company's profits to grow nearly 10% annually over the next three to five years.
If you want a play focused on Peru, buy Credicorp Ltd. (BAP), a Lima bank, founded in 1889, that now claims a 40% share of the country's deposits. While the stock, with a market cap of $7.6 billion, has doubled in a little over a year, its P/E is still only 14.
Also consider Vale (VALE), a huge (market capitalization: $137 billion) Brazilian mining company, with a P/E (on estimated 2010 earnings) of 8; and Copa Holdings (CPA), a Panama-based airline that specializes in regional travel, with a market cap of just $2.1 billion and a P/E of 9. Slightly more pricey but still tempting are Embraer (ERJ), a Brazilian maker of smaller jetliners used extensively by U.S. carriers, and Banco Santander-Chile (SAN), a majority of which is owned by Spain's Banco Santander (STD).
With an expense ratio of just 0.5%, the iShares ETF that I mentioned above is a cheap, simple method for investing in the region. The only drawback is a heavy concentration in resource stocks and in the stocks of one nation, Brazil.
I have a slight preference for Latin American Discovery (LDF), a closed-end fund that, unlike the iShares index, also owns midsize and small companies. It, too, owns a hefty share of oil and metals stocks, but you can't argue with its success. The fund, launched in 1992 and managed by Morgan Stanley, returned an annualized 16.3% over the past ten years through July 9. On that day's close, the fund, at $16, traded at a 7% discount to the value of its underlying assets.
Two conventional mutual funds stand out. Fidelity Latin America (FLATX), with 79 stocks, is far more diversified than the iShares ETF or Discovery and appears better suited to withstand a downturn in commodity prices. It carries an expense ratio of 1.05% and has returned an annualized 14.1% over the past ten years. T. Rowe Price Latin America (PRLAX), which, like the Fidelity fund, launched in 1993, carries a slightly higher expense ratio (1.29%), has a similar portfolio profile (though with more financial stocks), and has returned 17.3% annualized over the past ten years. The Price fund has performed better, but the Fidelity fund has lower risk, according to Morningstar.
A final choice, for more adventurous investors, is SPDR S&P Emerging Latin America (GML), an ETF with only two full years of returns under its belt. And they were exciting ones: down 49% in 2008 and up 104% in 2009 (in the first half of 2010, the fund was down 9%). The fund owns some of the usual suspects, such as Vale and Petroleo Brasileiro (PBR), but it has more small companies than the others. Its expense ratio is just 0.60%.
As Kiplinger's readers know, I am more optimistic about emerging (or, as I call them, aspiring) markets than I am about developed (or mature) markets for the long haul. If you agree, then spice up your portfolio with some Latin stocks.
James K. Glassman, former Under Secretary of State for Public Diplomacy and Public Affairs, is Executive Director of the George W. Bush Institute, in Dallas. His new book, Safety Net, will be published in February 2011. Sign Up for Free to Receive James Glassman's Opening Shot Columns Sent to Your Email
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