February 1, 2011
Beat the BRICS: The Three Latin America Markets You Can’t Afford to Ignore
By Martin Hutchinson, Contributing Editor, Money Morning
The stock exchanges of Colombia, Peru and Chile agreed last November to merge their trading, giving international investors access to roughly 600 stocks - more than any single country in Latin America.
Earlier this month, the trio demonstrated just how serious they were, with the Peruvian and Colombian stock exchanges entering into a full-blown merger agreement. These are the three best-run countries in Latin America, with a combined gross domestic product (GDP) of more than $500 billion.
If they get their act together, it'll be these three countries - and not Brazil, that much-ballyhooed "BRIC" country - that are the "must-have" havens for our money.
Let me show you why...
Global Investing Intelligence
As Money Morning readers well know, I have recommended Chile a number of times. And with good reason: In this period of high commodities prices, I continue to believe that this is the most attractive of all emerging markets.
And Colombia and Peru share many of Chile's strengths. Both countries have benefited enormously from the zooming surge in commodities and energy prices.
Peru is a commodities bonanza, with major potential in everything from gold to fish. Colombia, on the other hand, is already a significant oil exporter. And in recent years the country has caused the curve of its oil production to turn sharply upward - it produced about 760,000 barrels a day in 2010, and production is increasing at about 10% annually.
Each of the three countries is larger than any country in the European Union (EU), but their total population is relatively modest at 92 million. Total GDP was $528 million in 2009, but growth is rapid: Colombia grew at 4.4% in 2010, Chile at 5.1% and Peru at an extraordinary 8.7%. While all three countries have excellent relations with the United States (Chile has a free-trade agreement and Colombia has negotiated one subject to ratification by the U.S. Congress).
Also worth noting: China is active as an investor in all three countries, especially Peru.
The real secret to the success of these three countries is that they are competently run and have kept their public sectors under control. Chile, for example, has a public sector (as a share of GDP) that's about half the size of Brazil.
The three countries adopted their current free-market philosophies after traveling admittedly different routes.
Chile established free-market institutions under the dictatorship of late President Augusto José Ramón Pinochet, who took advisers from the University of Chicago. Peru got the free-market religion in the 1990s, after a period of socialism had run the economy into the ground. And Colombia, while subject to high levels of armed conflict, has always been primarily free-market in orientation.
The fact that these three countries each have a predominantly free-market outlook enables them to work together - even as neighboring countries such as Venezuela, Bolivia and Ecuador have relapsed into socialism and increasing poverty.
The big question for investors is whether the countries' free-market orientation will be maintained. The outlook is the most solid in Chile, where the social democrat government that left office in March 2010 was quite market oriented, and the new government of President Sebastian Piñera is even more so.
In Colombia, a free-market government led by Alvaro Uribe has been replaced by another free market government led by Juan Manuel Santos, in office until 2014.
In Peru, the outlook was cloudy at the time of the last election in 2006. But the prosperity that the country has seen since then has improved matters. Three of the four leading candidates for the April 2011 presidential election are free market in outlook; should one of these candidates win, the collaboration with Colombia and Chile can be expected to continue.
The main gain for the three countries from working together is the ability to achieve economic scale.
"MIST" Opportunities
Jim O'Neill, the head of asset management at Goldman Sachs Group Inc. (NYSE: GS), who coined the BRIC acronym in 2001, recently coined another acronym: "MIST," for Mexico, Indonesia, South Korea and Turkey. To create the MIST list, he included countries that he considered to be both "growth markets," and large enough, with output above 1% of gross world product (GWP), to have the "scale" to interest the largest companies and institutions.
Combined, Colombia, Chile and Peru have GDP of about 1% of the world's total, so if they can persuade investors that they really do represent a single bloc, they will attract a renewed flow of both direct investment by big companies and portfolio investments by the largest institutions.
The stock market merger that I outlined above is the first - and easiest - way for them to cooperate. And it should bring in a flood of new money once it's completed.
Currently, while mining companies will invest in the three countries to sell to world markets, manufacturing companies are less interested because local markets are so small and inefficiencies are inevitable. If, over the long term, the countries could form an actual "common market," their economies and living standards would benefit enormously.
In the short term, even without further integration, all three countries have excellent growth prospects. U.S. individual investors wishing to venture there will find a limited selection (though Chile has a dozen U.S.-listed companies).
For me, these three guys beat the much-hyped BRIC (Brazil) hands down.
There's a lesson to be learned here: Better management wins for countries, as well as for companies.
All indications are that Egypt has started a revolutionary process. Violent street protests are not new in Cairo.
Egyptians have taken to the streets every decade or so, to protest against cuts to subsidies or poor salaries. The last major revolt saw the rank and file security forces demonstrate against the extension of military service in 1986.
But this new intifada is different. The riots are the trigger that Egyptian society has long awaited.
Everything flowed from the state, and everything returned to it. The spine of this structure was its security apparatus; a more sophisticated securitocracy than Tunisia, but a securitocracy nevertheless. Other bodies have been hollowed out, but not the institutions on which Mr Mubarak depends.
Until recent days the numerous agents deployed for even minor demonstrations projected an image of regime invincibility. Yet the larger they have grown, the more fragile their composition has become. There are now no fewer than eight different agencies – including the army, but not the groups of thugs deployed for dirty tricks. But their sudden disappearance from the streets in the face of demonstrators was baffling to the population and remains inexplicable.
The army fought its last war in 1973. Since then it, along with the rest of the sector, has been devoted to one mission: watching the population. Indeed, the army quelled social rebellions three times in the past 50 years. Its importance in maintaining order suggests two important questions. What price did the generals extract from Mr Mubarak, after he called on them to intervene last Friday? And are they still standing by him?
Egypt’s army has an intricate economic portfolio, and thus a strong interest in maintaining the status quo. However it also sees itself as the guardian of the interests of the Egyptian state. It may now be developing a new vision of how the state’s interests ought to be preserved – one that need not include Mr Mubarak.
The reform movement, meanwhile, knows that the regime has had every chance of engaging in a process of gradual reform. Most Egyptians, including these activists, have been keen to preserve social stability while hoping that change would come with the consent of its leaders. But the government has revealed that it is neither in control, nor willing to cede power. This has created a power vacuum, partially filled on the streets.
Now the handling of the situation by the army is what matters. So far, a small group of four or five security chiefs form an inner circle around the president. Formally they come under his command, but in the past few years of his illness and absences they have been increasingly in charge. It is clear now that Mr Mubarak is not in a position to prevail over them.
The riots changed the rules of the game. They signalled to these members of the “deep state” that putting the regime’s house in order can no longer wait. These men’s own credibility depends on an orderly transition. But when rage on the streets raises questions about Egypt’s direction, their eyes turned to the US to read the signals.
Growing signs that Washington is edging away from Mr Mubarak, therefore, will have been watched carefully. Egypt’s elite and public resent Washington’s traditional heavy hand in their affairs, and deny that Washington influences their decisions. But the rioters will also note with satisfaction that statements from the US have legitimised their political demands.
Protesters, however, are not an alternative. One might come from a constellation of groups co-ordinating with followers of Nobel laureate and opposition leader Mohamed ElBaradei. Many believe Mr ElBaradei has been too cautious so far, but through his public interventions he has become a catalyst of change. He could yet emerge as the man of the moment.
First, however, the elite must make its move. On Friday Mr Mubarak conjured up obscure forces bent on destabilising the country. Only his regime, he claimed, could protect Egypt from the fearsome combination of the lumpenproletariat of Cairo’s slums, and the Muslim Brotherhood.
Leaders in Cairo and Washington worry about Islamists taking over. Yet it seems the Brotherhood was as surprised by the uprising as the government and opposition, while its leadership has been slow to read the new politics of Egypt.
They have been reluctant to fall in behind the social movements that have mushroomed across the country, and are now divided over strategy. Their younger members are also frustrated with the movement’s ageing leaders – a picture that replicates exactly the structure of the regime they seek to overturn. A weakened, fractured Brotherhood should present no mortal threat to Egypt’s future.
Egyptians now expect the announcement of a democratic transition process that will put an end to their political conundrum of having to put up with military rule to prevent the advent of the Muslim Brothers. They have yet to find out whether the voice of the “street” is strong enough to prevent the establishment from successfully concocting a managed scenario. But they will know one thing for certain: the post-Mubarak era has now begun.
The writer is executive director of the Arab Reform Initiative
