Playing The Latin American Pullback

By Aaron Levitt | February 16, 2011 AAA

After producing tremendous gains over the last two years, emerging markets have seemed to have fallen out of favor with investors. Ballooning inflation in China and India, coupled with weaker economic growth numbers have certainly taken out investors euphoria for the sector. According to Citigroup, emerging market funds saw over $7 billion in redemptions last week alone. The broad-based iShares MSCI BRIC Index (NYSE:BKF) has been roughly flat over the few months. The riots and protests in both Tunisia and Egypt have all weighed on investors' minds and many have returned to the relative safety of developed markets. With the wide-spread fleeing of emerging markets over the last few weeks, longer time-lined investors have an opportunity to add one of the regions of the emerging world.


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A Growing Region
As a whole, Latin America has managed to avoid the lingering effects of the global financial crisis. The region's manageable debt and strong financial system that was not exposed to toxic assets has helped prevent many of the problems facing its developed market sisters. No longer the Banana Republics of old, which once were fraught with periods of violence, hyperinflation and meltdowns, Latin America has become one of the major catalysts for future global growth.

The International Monetary Fund estimates that Latin America will expand by 6% in 2011. Chile is projected to have GDP growth of 4.7%. Latin America's rich abundance of natural resources are helping fuel that growth. As demand for energy and agriculture based commodities continues to rise at exponential rates, nations such as Peru will see the benefits of rising commodity prices. Some experts see Latin American emerging markets outperforming Asian ones as they are more leveraged to the commodity sector. Exports aside, many analysts are bullish on the prospects of domestic consumption fueling future GDP growth within the region. Commodity-dollars will help spur new improvements in infrastructure and consumerism across Latin America.

Recent Correction Not a Crash
The recent pullback in emerging market assets may be the perfect time for investors to consider Latin America for a portfolio. According to analysts at JPMorgan, the Bovespa's 9.9% drop from the November highs is most likely a "correction" and not a "crash" as Brazilian earnings are still growing and fund flows from emerging to developed markets have diminished. Strategists with the bank also note that Latin American stocks have returned an average of 33% in a year after experiencing declines of 10%.


Adding Exposure
With a sound long-term story, investors wanting to add Latin America to a portfolio do have several choices among the region. The broad-based SPDR S&P Emerging Latin America ETF (NYSE:GML) contains 305 holdings across Brazil, Chile, Mexico and Peru including iron ore giant Vale S.A. (Nasdaq:VALE) and Brazilian bank Itaú Unibanco (Nasdaq:ITUB). The fund charges 0.59% in expenses. For investors preferring to hone their exposure to the fastest growing nations within Latin America can do so with the Global X FTSE Andean 40 ETF (NYSE:AND). The new fund focuses on rapid economic growth of Chile, Peru and Columbia.

Providing a gateway to the Latin American consumer, Fomento Economico Mexicano (FEMSA) (NYSE:FMX) produces, distributes and markets Coca-Cola (NYSE:KO) products through nine countries in Latin America. It also operates Latin America's largest convenience store chain, OXXO. Shares of FEMSA yield 1.1%.

Columbia is quietly becoming a major oil exporter, producing about 760,000 barrels a day in 2010. Analysts estimate that its production will increase about 10% annually over the next few years. Ecopetrol SA (NYSE:EC) is the nation's chief oil company and is responsible for about half of Columbia's expanding oil output.

Bottom Line
Recent concerns in the emerging world have left many investors fleeing to the relative safety of developed markets. However, investors shouldn't paint the entire sector with a wide brush. Latin America represents a great long-term opportunity, and the current asset redemptions make an ideal time to add the sector. The preceding funds or stocks like cement maker Cemex (NYSE:CX) make ideal choices. (For related reading, also take a look at How To Play The Emerging Markets Trend In 2011.)

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