Chile is best emerging market for the next decade

The foundation is in place for sustained long-term growth -- and an enormous disconnect has this nation looking as attractive as ever.

By StreetAuthority Dec 20, 2013 1:00PM
Image: Globe (© Comstock/SuperStock)By David Sterman                                                                          

I recently posed a hard-to-answer question: Where will next year's top-performing markets be?

To answer that question, you have to make certain assumptions.
 
• Will commodity prices rebound? If so, then the iShares MSCI All Peru Capped ETF (EPU), which has been the worst country fund of 2013, could post a great rebound.

• Will the rebuilding process in the damaged parts of the Philippines lead that economy to resume its recently spectacular rates of economic growth? That was the case in Indonesia, which went on to deliver one of the world's most impressive growth rates after the devastating tsunami of 2004.

• Will it be Turkey, which is aiming to bring down inflationary pressures so the country's ideal geographic positioning help it again become the trade conduit between Europe and Asia, the Middle East and Africa?

• Will it be the BRICs (Brazil, Russia, India and China), which collectively account for more than half of the world's population -- and, as a result, possess huge domestic market growth prospects?

Simply using a one-year time horizon for potential gains is the wrong way to focus on the topic. All these countries have great long-term potential, but some are beset by problems that may take more time to play out than investors are willing to allow.

Instead, it's smart to ask which emerging markets have the necessary ingredients for both stable economies in the near term and solid growth drivers over the long term. And it helps to identify markets that have moved deeply out of favor in 2013.

Critical mass
To start to winnow down the list of potentially appealing emerging markets, you need to start with those economies that have already attained a certain level of heft. By definition, that would entail a close look at the BRICs, but problems arise. Russia is a demographic time bomb, India is buckling under the weight of a dismal infrastructure, Chinese stocks have already fared relatively well in recent periods, and Brazil, one of my favorite long-term growth stories, has yet to feel the full impact of a recent hike in interest rates.

So what other emerging markets have the sufficient size (and critical mass of domestic consumption) that can give investors the confidence that they are not simply the next domino waiting to fall? Here's a look at the 10 largest emerging-market economies outside of the BRICs.



Mexico, Indonesia and Turkey have such large economies that they represent a degree of long-term stability that is crucial for some emerging-market investors. And per-capita income of around $10,000 in two of those countries involves sizable middle classes.

But we can cross Turkey off our list right now for one simple reason: The country's middle-class consumers are spending way too much, and much of those purchases are imports, leading to an unsustainable $100 billion annual trade deficit (according to the World Trade Organization). The U.S. has always run huge trade deficits without trouble, thanks to the importance of the U.S. dollar, but other countries have no such luxury.

Yet the greatest measure for investors is per-capita income, as that ties directly to domestic consumption. And you'll note that Chile, with per-capita GDP of more than $16,000, is a global leader among emerging markets (excluding oil-rich nations in the Middle East, which aren't really accessible to U.S. investors).

The cream of the crop
By a wide variety of measures, the Chilean economy has emerged as a force to be reckoned with -- and the fact that Chilean stocks have stumbled badly in 2014 just heightens the appeal. Here's a quick overview:

The Heritage Foundation cites Chile as the seventh-best country in the world in terms of economic freedom. A lack of corruption and a widespread trust in public institutions are key ingredients for successful businesses.

• With $42 billion in foreign currency reserves, Chile is virtually immune to the currency risks that beset other emerging markets.

• In the past 35 years, the number of Chileans living in poverty has fallen from 50% to 11%.

• Chile has balanced foreign trade, with $57.6 billion in exports and $56.8 billion in imports in the first nine months of 2013.

• The Chilean middle class has a great deal of economic security, thanks to a well-run pension system.

Yet as noted, Chilean stocks have fared quite poorly in 2013, due in part to slumping copper prices, which still account for a large share of the country's exports. But the best way for Americans to invest in Chile, the iShares MSCI Chile Capped ETF (ECH), actually has relatively limited exposure to the mining sector.



Clearly, investors have been very focused on the impact of copper prices on all of these businesses. Retail spending, for example, takes a hit when copper miners are working less. Yet Chile is hardly struggling. The economy is expected to grow 4% to 4.5% in 2013, though that's down from 5.6% in 2012.

And make no mistake, Chile is not positioned to have one of the fastest-growing economies in the years ahead. That honor will go to countries with much smaller rates of per-capita GDP. But Chile's rising middle class, growing role in Latin American trade, and abundant natural resources should help keep growth moving ahead of developed economies' growth rates.

Which brings us back to the Chilean stock market, which has stumbled badly. The iShares ETF has severely underperformed the S&P 500 Index this year, to an extent not seen in a very long time.



Even if you assume that U.S. and Chilean economies possess equivalent growth prospects, you'd have to conclude that the recent market performance implies that U.S. stocks are now sharply overvalued, or Chilean stocks are sharply undervalued.

Or perhaps a combination of both.

Risks to consider: Chile has just elected a new government that's aiming to expand free education with funds from higher corporate taxes. That could serve to brake the economy, though it could create an even larger middle class in coming years.

Action to take: Although a number of emerging markets have stumbled badly in 2013, few of the laggards have built as strong and sustainable platform as Chile has. Though it's hard to pinpoint how this market (and ETF) will fare in 2014, a long-term investment in Chile has never held more merit.

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29Comments
Dec 20, 2013 5:34PM
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Good Lord I hope "V_L" is a loner.  I cannot imagine how anyone could stand being around such a "Nattering Nabob of Negativity" as Spiro Agnew used to say.   Hey V_L, what happened to your grandiose prediction of the massive stock market collapse as soon as the tapering began?  You and your friends Anthony M. and Bill Fleckenstein should be off in a corner licking your wounds instead of blathering on about things you obviously know nothing about.  You sir, are a blowhard.  Get off the comment boards, and go find full time employment.
Dec 20, 2013 6:26PM
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No thanks - I'll stick with American Stocks in spite of our current Communist President !
Dec 20, 2013 3:27PM
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More liberty in Chile than in the U.S.
Dec 20, 2013 4:19PM
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The recent presidential election has resulted in a left of center president being elected, as was widely anticipated. This follows a right of center president. I would assume that the expected election of this president is why their market has been dropping.
It's still a great place to invest, and a great place to visit and live-but buyer beware as they have more class warfare than we have and there's no telling what the "reforms" will be.
Dec 20, 2013 3:23PM
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The risk sounds like more of an opportunity for investing in Chillie-- the education reform.  As stated advantage with its well funded pension system providing security for demand.
Dec 20, 2013 8:40PM
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   Chile has been a free enterprise capitalist model for the third world over a number of years thus its success. However recently there has been talk of nationalizing its copper mines, etc. This of course will send it down the same road as Argentina.  Be careful with this one.
Dec 22, 2013 12:49PM
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user90...Blah, blah, blah; Any basis in factual evidence of your statement or are you just a fkin moron? 
Dec 20, 2013 4:01PM
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FROM THE BOOK OF AXELROD
CHAPTER 2
THE BIRTH OF A MESIAH
In those days a decree went out Washington DC, that the U S A  should be taxed. This was the 1st enrollment when SEBELIUS  was governor of the affordable care act. So all went to be enrolled each to his own website.And SOROS  went up from Greece to the town of Washington to the city of DC called money BAGS because he was  of the house of the federal reserve. Soros  declared we needed a new Messiah. While they were there the time came for DC to give birth to a new  child  a firstborn son.
 He  wrapped him in swaddling clothes and gave him the gift of rhetoric, and babble. He was born in the Holiday Inn because there was no room at the Hilton.
 Now there were CONGRESSMEN in the field keeping watch over their flock. The angel of Pelosi appeared to them in the glory of REID shone upon them and they were struck with great  FEAR. Pelosi said unto them to not be afraid , BEHOLD I proclaim to you  great news of joy that will be for all people. For today the city of DC a Savior is born for you who is the Messiah,OBAMA
 and this will be assigned to you you will find the anointed one WRAPPED swaddling clothes and living at  Tony RESCO's house. There was a multitude of heavenly host with Angels saying
 GLORY  be to Obama in the highest
 and on earth peace to those to whom his favor rests
THE SHEPHERDS VISIT
  When the Senators went away from them back to DC, the congressman said to one another  let us go to DC to see this thing which is taking place. So they went in haste and found REID AND PELOSI  the new  born Obama  lying in the Holiday Inn. When they saw this they've made known the message that had been told about this child. All who heard it were amazed by what had been told by the senators. Then the congressman returned glorifying and praising Obama for all they had heard and seen just as it had been told to them.
 Days later the 3 kings arrived  to pay homage to the new Messiah, they were BERNANKE,YELLEN.AND TARULLO. THEY LAID GREAT GIFTS of Q E  at his feet and proclaimed him to be the one !
Dec 20, 2013 3:31PM
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"I recently posed a hard-to-answer question: Where will next year's top-performing markets be?

To answer that question, you have to make certain assumptions."

The correct answer to that question requires NO assumptions: "If I could answer that question I'd be sitting on a beach in the South Pacific sipping a drink instead of working in an office."

That comes from one of the first books on stocks I read in the 80's where the author of one chapter gives that reply after a client asks, "What's GE going to do today?"
Dec 21, 2013 3:13PM
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 Chile is following Milton friedman's  free market  economic  philosophy  not the  Keynesian Economics  government  control  philosophy   Like Argentina, Bolivia ,Venezuela and the rest of left wingers in Latin America who have  massive   debt , rising poverty rates  and are  dump holes just ripe for more populist dictators to keep their power...
Dec 20, 2013 5:55PM
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OMG....After reading several of these comments...I just want to roll up in a ball and die.
Dec 20, 2013 4:09PM
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with the business environment Barrick has found in Chile it makes me question any investment with a Chile connection except for possibly puts.
Dec 20, 2013 4:58PM
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"with the business environment Barrick has found in Chile it makes me question any investment with a Chile connection except for possibly puts."

He's the President, moron. If Chile is being prospected for industry, wouldn't you think banks and business administrators would be behind it. For God's sake... SHUT THE LIMBAUGH OFF and look out your window at Reality. YOU had a lot to do with how bad it is. Somebody hired you once- a 3rd Grade mentality, but won't hire a Graduate Degree now.
Dec 20, 2013 4:49PM
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When we see speculation in some backward nation... remember that the cotton industry relocated from the Southern USA to the 'Stan nations bordering the Aegean Sea. Why? Because the nations were desperate for back pocket cash and willing to overlook global mandates on pesticide use and child labor laws and every other prohibition, just to get denim to China where it could be turned into Clearance Rack Store Brand jeans in the USA. 
If the world wants "global" to work, it has to rocket wealthy deep pocket morons into space and get some genuine cooperation and commonalities in sync. You want sweat wages... start at the top in the Boardroom and demand unit productivity and efficiency beyond the human capacity. It it can be done there, then I guess the rest of us have nothing to complain about. If not, SHOOT THEM and let's get commonsense back in driver's seat. 
Dec 20, 2013 4:11PM
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Just avoid anywhere that follows Repukelican policies. You'll lose everything!
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