Latin America's traditional lousy government was due to a number of factors. The legacy of Spanish colonialism lacked the free-market focus that was a British legacy in North America. The Continent retained a tradition of government activism and corruption that has proved hugely damaging for Latin America.
Then there was the curse of natural resources: It was always impossible to establish an internationally viable industrial sector when abundant (albeit cyclical) resource income pushed exchange rates up too far. During the 1945 to 1980 period, the World Bank pushed policies of import substitution that made no economic sense, and encouraged the countries to run up debt. Only in the 1980s – when the international capital markets opened again to equity investments even as debt was cut off by the Latin American debt crisis – did economic policy in a few countries begin to improve.
Chile has been a pioneer in that improvement. The dictator Augusto Pinochet, who served from 1973-1990, established free-market norm, reduced the size of the state, and privatized the pension provision, for example.
When Pinochet left power, his democratic successors retained enough of his policies to ensure that Chile never built up much public spending or foreign debt. Consequently when the downturn arrived in 2008-2009, Chile had a $19 billion trust fund – saved from the proceeds of copper sales – that it was able to spend on social programs.
The bottom line: Even during this period, Chile was better run than most of Latin America.
Since 2000, a stretch during which Chile was governed by the left, economic growth had been somewhat sluggish.
This January, billionaire businessman Sebastián Piñera was elected as the new president of Chile, making him the first right-of-center leader since Pinochet. Piñera has promised to increase the pace of economic growth by freeing up regulation and cutting taxes on business. The February earthquake has slowed the implementation of more free-market policies, but has not halted it.
Chile is a major producer of agricultural products and a number of commodities, particularly copper. That's an advantage in today's global economy, where rapid Asian growth has raised the value of commodities worldwide.
With good management, Chile is destined for rapid growth. The current Economist estimate of 5.0% growth in 2010 and 4.7% in 2011 is almost certainly too low – and by a significant degree (especially the 2011 projection).
With a relatively small government and ample foreign-exchange reserves, the Chilean market should be an essential, albeit modest, part of any international investor's portfolio, even at its current Price/Earnings (P/E) ratio of 19.3.
And Chile no longer stands alone.
If we take another, closer look at Latin America, we discover that Colombia is the newest convert to the school of shrewd government. The country has had a drug-and-terrorist problem for 30 years, and before that it endured a civil war.
However, Colombia President Alvaro Uribe, in office since 2002, has greatly alleviated the security problem, although he has not solved it. Between 2002 and 2009, Colombia saw homicides decrease by 45%, kidnappings by 92%, terrorist attacks by 71%, and attacks on the country's infrastructure by 83%, the U.S. State Department reports.
The Supreme Court declared in February that Uribe could not succeed himself, so Defense Minister Juan Manuel Santos ran as his designated successor. Santos was opposed by Antanas Mockus, a populist former Mayor of Bogotá . But after an opinion-poll scare in mid-campaign, Santos was elected on June 20 with 69% of the vote.
Colombia is rich in natural resources – with oil production currently increasing rapidly – although the country also has a vibrant agricultural sector.
The Economist's forecasters are more pessimistic about Colombia, estimating growth of only 2.4% in 2010 and 3.8% in 2011. Once again, however, those projections really appear to be low, especially if a new U.S. Congress in 2011 finally ratifies the U.S./Colombia trade treaty, signed in November 2006, and never ratified.
Colombia is still at an earlier stage than Chile in its economic development, with a per-capita GDP of $9,200 at purchasing power parity, compared with Chile's $14,700. However, it is geographically better located, closer to major markets, and thus has considerable upside potential. There is not much we can invest in yet, but a modest purchase would seem attractive.
The media enjoys stories of the bombastic Venezuelan strongman Hugo Chavez, together with his followers Evo Morales of Bolivia and Rafael Correa of Ecuador. The corrupt and inept Kirchner regime in Argentina also gets substantial press.
Nobody with any sense would invest in any of those countries.
Colombia and Chile, however, are a very different matter, well worth our attention, and will perhaps provide models for the remainder of the continent. Even the vaunted "BRIC" emerging market – Brazil – let alone the large and highly corrupt Mexico, could learn a huge amount from their example.
When it comes to investing, a country is no different than a corporation: We always want to back good management. Therefore, for our Latin American investments, I recommend Colombia and Chile – both countries clearly possess the strong management that we seek.
There are only two Colombian shares with full American Depository Receipts (ADRs) on the New York Stock Exchange. Of the two, Ecopetrol SA (NYSE ADR: EC) is the more interesting. This oil-and-natural-gas player is participating fully in the expansion of the Colombian oil sector, where May production rose 19% on a year-over-year basis. It's trading at 22 times earnings, but only 13.5 times forecast 2011 earnings, and features a juicy 4.2% dividend yield.
In Chile, I like Vina Concha y Toro SA (NYSE ADR: VCO), a producer of very-high-quality wine. It's currently trading at 20 times earnings, with a dividend of 4.3%. That's a somewhat premium valuation, but I like the dividend and Vina Concha is unquestionably a premium company.
Investing in Latin America has always been a high-risk proposition.
But in Colombia and Chile, it has recently become much less so.
Action to Take: Chile is by far the emerging market I'm most excited about. And there's one company in particular that I'm convinced will soar in the months to come. It operates in one remote part of Chile and its mines threaten OPEC's very existence. There, under a dried up lakebed, lies the future of world fuel demand. And it's not oil. In fact, this "wonder substance" could actually replace up to 148 billion barrels of oil.
The riches buried here could generate 6 times the money oil will produce – even if oil reaches $200! And this one company owns all of these high quality reserves – making it the world's go-to supplier. Estimates show as much as 2,840% gains for early investors.
I would like to consider investing in Lithium mining.
It is (and has been) time to invest into Chile!
Obviously this writer has views from the right. Seems to credit Pinochet and puts left leaning Chilean government (since Pinochet) as anti growth.
On thing that Pinochet did keep that he said he did want was the nationalization of Chile's copper mines. It is the nationalization of these copper mines that have contributed to Chile's healthy trust fund.
Speaking of trust funds, this was form by the left wing government; if it were up to the right wingers in Chile… Chile would not have had this trust fund to fall on during the global financial problem.
On top of this, the writer fails to mention that the slow down in Chile's economy since 2000 was due to global slow downs AND the price of copper being down.
Now that the price of copper is up; Chile again is doing very well. Amazing how the price of copper correlates to Chile's progress… then again, it is (currently as it has been for some time) the main bead maker for Chile.
So… to be fair… Chile is doing well due to the privatization of the copper mines that Pinochet was originally against. As nice as the writer makes Chile sound… unfortunately he has failed to tell the truth of why Chile is progressing.
BTW, keep in mind that during the Allende years; with help from the CIA, Chile suffered food shortages, as well as market devaluation due to hording that was done by right wing business owners and contracts being commercial broken (with the U.S.), leading to a failing economy. Sorry, but back in the 70s (and before)… when the most powerful country in the world wanted to have a tiny country to fail… this country would fail. By contrast to other countries, who's governments collapsed… it took the most powerful government in the world to help form a coup to forcefully bring down a peacefully DEMOCRATICALLY elected government.
What a shame that truths are still not fully told and examed.
Collecting my past memories I can still remember that Pinochet got wind of the planned coup by Allende and quickly organised a counter coup timed a couple days earlier and thus trounced the Communist take over of Chile. After the surrender of La Moneda Presidential palace and suicide of president Allende at his own failure, a ship laden with soviet arms quietly slid out from Valparaiso harbour before being impounded by Pinochet's men.
The importation of spare parts for transport vehicles was quickly reorganised bringing to an end the food and other essential commodities shortage that appeased the "housewifes revolution" that had invaded the capital's streets and Alameda during the previous weeks.
Could you please explain briefly why Ecuador is considered a "dreadfully run" country?
I am a US expat living 11 years in Chile. Too many Chileans still live in the past which is probably the biggest handicap the country has. To that end I fully agree with Mr. Hutchison's assesment given that the education level continues to improve in Chile thereby further enabling the untapped human capital that will overcome the left over dependecies on government hand outs. The right business model is slowly emerging. Pinera has the right model. The reality is that it has to be spoon fed to the masses. Vive Chile mierda!
i would love to have any information in to investing in to chile.