As the second quarter begins, and uncertainty in the U.S. market prevails, investors might want to start looking south for some opportunities. For the first quarter, Latin American indices were amongst the best performers around the globe. Earlier this week on Power Lunch, Joyce Chang, Global Head of Emerging Markets Research at JPMorgan, highlighted that emerging markets remain a defensive play especially in Latin America and emerging Asia. If the theory of decoupling holds true, emerging markets could enjoy continued growth despite a slowdown in the United States economy.
Investments in certain Latin American countries could stand to benefit from their growing middle class and their abundant natural resources. Consider Chile, for example, its GDP is projected to grow by 4% during 2008, and is expected to steadily increase at an annual average rate of 5.2% from 2009 to 2012, well above the forecasted growth for the United States.
Chile is the number one producer of copper, generating 5.4 million tons of the commodity in 2006, almost four times more than the second largest producer, the United States. Copper is mainly used for construction, electric and electronic products, and transportation equipment.
The price of copper has increased nearly 24% YTD, and 20% from a year ago. The increase in copper prices has fueled a government surplus of 8.7% of GDP, as noted by The Economist. A free-trade agreement with Japan came into action in 2007. Japan is Chile’s second largest importer of goods, after the United States. Free trade agreements with Latin American, European and Asian countries are expected to follow.
Political and economic risk could potentially hinder growth targets. The inflation rate has been kept at an average of 4.4% in 2007, and The Economist forecasts that the rate will remain at an annual average of 3.72% from 2008 to 2012. Nevertheless, unemployment has been trending upward with a reading of 7.3% in February, or up .1% from the prior month. The political friction that exists amongst political parties is another challenge.
The Chilean peso has appreciated the most against the US dollar amongst the most traded Latin American currencies. Chile’s peso has advanced nearly 12% year-to-date versus the US dollar, with one dollar purchasing 433.5 pesos.
Some Chilean ADRs include:
Sources: The Economist, Banco Central de Chile, LIM, Reuters