Latin America: So Much More Than Just Commodities
Last year, Latin America was home of some of the best performing stock markets in the world. Peru, Chile and Colombia were the number two, three and four best-performing MSCI emerging market country indexes in 2010, driven primarily by the strength in commodity markets.
In fact, something I’ve talked about recently is the “New Silk Road,” which is an expression that has been used to describe the growing commercial interaction between the emerging markets of Asia, the Middle East, Africa and Latin America. This new, 21st-century version of the Silk Road effectively connects China and its voracious demand for commodities with commodity-producing countries.
But Latin America is so much bigger than just commodities. In Latin America, we have positive demographics, relative political stability and pro-business policies — save for Venezuela and Bolivia — as well as the development of consumer economies as prosperity trickles down to the masses.
Let’s take a look at five Latin America investments that are offering some very interesting opportunities:
#1 – AFP Provida
Chile is the most advanced market in Latin America with a GDP per capita of $11,600. The country has been benefiting from years of conservative budgetary policies that aim to save surpluses in a stabilization fund for a rainy day (like 2009), which contributes greatly to macroeconomic stability. And you better believe there are plenty of ways to play the boom here.
The first is AFP Provida (NYSE: PVD), a pension fund administrator that is expanding in new financial services and regional markets. The company has a highly stable fee business, which allows it to pay a 7% dividend with a valuation of nine times earnings. As plan assets grow, the company fee income grows. Rapidly developing Latin American economies allow for bigger pension contributions over time, which is a long-term positive for AFP.
#2 – Vina Concha y Toro
Vina Concha y Toro (NYSE: VCO) is a Chilean wine maker popular in the United States with its low-cost Frontera wines, although the company is much bigger than just that. The entry strategy has worked in the U.S. market, and I think management will head up-market soon with some of the company’s higher-end wines.
Within Chile, Concha owns vineyards located in Chile’s nine principal wine-growing regions. Concha also owns a winery and vineyards in Mendoza, Argentina, a region that is also famous for its wines. The shares trade at 18 times earnings with sales growing at 11% with very little debt. This is an agricultural stock of sorts that is also a hedge against rising inflation.
#3 – Compania de Minas Buenaventura
Peru is not quite as advanced as Chile, posting a GDP per capita of $5,200, but the stock market performed spectacularly last year as it is more leveraged toward mineral prices. Mining is big deal for Peru, similarly to Chile, but the country is growing from a smaller base with much-needed infrastructure investment taking place at the moment.
There is only one listed U.S.-listed ADR — Compania de Minas Buenaventura (NYSE: BVN) — a diversified mining company with big precious metals exposure. Sales are growing at a 20% clip with gold, silver and lead seeing increased volumes when compared to last year, while other metals like zinc and copper have seen volume declines. Management has many mines that operate in Peru, and has the discretion to increase productions in various metals that it deems more profitable. The company is very well politically connected in Peru and has great reserves with years of growth ahead of it.
#4 – Ecopetrol
Colombia has made major progress against the drug cartels in recent years and is expanding the development of the energy sector in areas of the country that have previously been deemed as nearly impossible to do business with. As those pro-business policies expand, the country will keep attracting more and more FDI flows.
Ecopetrol (NYSE: EC) was incorporated in 1921, and since has been the dominant oil company in Colombia. It is vertically integrated with operations in exploration and production, transportation, refining and marketing.
If you drill for oil in Colombia, you’ll very quickly find yourself dealing with Ecopetrol in one way or the other. There are numerous ventures with foreign oil firms, but in January 2011, Ecopetrol took over BP Exploration Company (Colombia) Limited as BP (NYSE: BP) was making strategic sales to raise cash. This is a large oil company with a market cap of $83 billion, about a 3% dividend, and near-guaranteed growth in a country with large oil reserves.
#5 – Bancolombia
Another way to play the economic resurgence of Colombia is via Bancolombia (NYSE: CIB), which is expected to grow earnings by the double digits in 2011.
The company offers diversified banking services, including asset management, insurance, pension services and brokerage services to both individual and corporate customers in Colombia. Bancolombia also operates in El Salvador, Panama, Puerto Rico and the Cayman Islands. In the latest reported quarter, net loans grew 7.8% compared to the year-ago period. Consumer loans in Colombia rose 19% compared to last year, which shows that consumers are becoming a bigger force in the Chilean economy, a major trend in Latin America.
Although my China Strategy and Asia Edge newsletters deal primarily with the emerging markets of Asia, the ever-increasing demand from the emerging nations there has kept Latin America countries in a strong economic position, and we are increasingly finding more and more investable connections in other nations outside of Asia, which are, nonetheless, tied to Asia’s rise.