Investing in Latin America is not a new strategy. The Brazilian and Mexican stock markets have been in rally mode for years and are two popular investment choices for investors looking for foreign exposure. Because of the political situation in many of the countries in the region, investors typically do not branch out from the big two.
It is now time for investors to begin considering a new investment opportunity in Latin America - Chile. Since 1998, the Chile's interest rates have fallen from the high teens down to 3.25%. When rates began to drop it was not enough to save the Chilean stock market as it fell from 1997 through 2002. During that time the Chile Fund (AMEX:CH), a closed-end fund, lost 80% of its value. When the stock market bottomed in 2002 the GDP was 2.2%, the second lowest number since 1985. The economy is still in recovery mode like many of its peers, but many investors are looking for 2011 to be the year that things turn around.
The Chile Fund
For those investors who are interested in investing in Chile through the use of exchange-traded fund (ETF), your best choice is the iShares MSCI Chilie Investable Market Index Fund (NYSE:ECH). This ETF seeks to provide investment results that correspond to the MSCI Chile Investable Market Index and unsuprisingly the top holdings are similar to those of the Chile Fund mentioned above. These two vehicles are efficient ways for any investor to gain exposure to Chile since most Latin American ETFs limit exposure to this country in a range that is typically less than 10% of the allocation. (To learn more about closed-end fund, see Uncovering Closed End Funds and Open Your Eyes To Closed-End Funds.)
The makeup of CH is attractive due to a heavy weighting in local utilities, resources and basic industry. Foreign utilities are able to take advantage of the weak U.S. dollar because the majority of their revenues come from local currency. The resources and basic industry part of CH is focused on the mining industry. Chile is the largest copper producer in the world.
The few issues that scare investors away from CH are the high fees, low liquidity and lack of diversity. The expense ratio is a lofty 1.94% because it is a closed-end fund and not an ETF. The fund only trades approximately 60,000 shares per day, making it difficult for big money to maneuver in and out of positions. Then there is the high concentration at the top. The top three stocks make up 43% of the entire allocation.
Stock Picking in Chile
Investors that do not mind taking on the added risk of investing in an emerging country have a handful of Chilean stocks that trade on U.S. exchanges as ADRs. The No.3 holding of CH is Empresa Nacional de Electricidad (NYSE: EOC) the largest power generator in Chile. Another power play from this region to consider is Enersis (NYSE:ENI). ENI has operations in Chile, Brazil and Argentina among others. Both stocks have enjoyed great runs over the last few years and remain 'buy' candidates as long as the uptrend continues.
With more than 498 branches in Chile, Banco Santander Chile (NYSE:SAN) is the largest bank in the country. Anytime an emerging country is creating more wealth for its citizens it bodes well for the banks. As the middle class expands it creates a need for more banking services throughout the country.
Lastly, when the airline stocks found a bottom in 2002, Lan Airlines (NYSE:LFL) was sitting around $1 per share. As of December 2010, the stock was trading above $30! The leading airline in Chile provides passenger travel to many different destinations as well as freight transport. All airlines must be concerned with rising energy prices, but LFL is one of the few that is making a sizable profit.
After this brief look, you might be considering Chile a buying opportunity, or the above-average risk could have scared you away. The final decision is all yours, but now that you have a few insights into the country and a number of its investment opportunities, you are ahead of the crowd.