Latin America's Top-Performing Stocks
The Top Plays on Emerging Latin America in 2010
Even though the sun is plenty bright on the East Coast of the U.S. today, I've got my eyes on the tropics.
I'm looking at Colombia specifically. That's where the World Economic Forum for Latin America is going on this week.
The theme of this year's meeting: New Partnerships for a Sustainable Recovery.
As rapidly developing regional economies rocket out of the global recession, fresh arrangements of priorities and money will set Latin America's growth trends for years to come. So let's look now at where we can find the best returns...
Different Economies, Same Growth Goals
The world wants what Latin America has. From bananas to copper, the region is resource-rich. Money is coming in like never before, driving up the price of local currencies like the Brazilian real. If a currency acts like a national stock price, money movement is pointing to rising future earnings for many countries in the region.
That doesn't mean we should take the whole area as a giant target, however. To make more than the average investor watching from afar, we have to differentiate.
Consider what "Latin" means in English-speaking countries. Generally, Spanish and Portuguese speakers and their countries — not the Caesars or Rome — are what comes to mind these days. Miami and many other cities have their large Latin communities, and the U.S. even hosts Latin Grammys every year to honor grandes estrellas (big stars) from their musically-infused culture.
But ask a Dominican if he's the same as a Brazilian, or try to lump the growth of a country like Peru in with Venezuela, and differences start to stand out quickly.
Same goes for the countries that will be represented in the coastal Colombian city of Cartagena this week.
Take Chile, which is riding high on copper demand despite the severe earthquakes that recently shook the country. Although reports indicate that Chinese demand for the malleable metal is slowing, the head of national copper company Codelco says higher production is "not at risk." U.S. and European demand will take up slack from the Middle Kingdom, CEO Jose Pablo Arellano said Monday.
Chile has seen copper rise from $2 per pound in April 2009 to right around $3.50 today — a new 20-month high. The Chilean peso has gained significantly over the past several years, rocketing from 750 pesos to the greenback, to 500 per dollar now.
Next door to Chile, Brazil's currency has gone from 3.75 per dollar to just 1.75 now, increasing the purchasing power of consumers and companies there in Latin America's largest economy. Sugar is selling well, and the country is advancing a renewable energy infrastructure rollout that will lead to greater energy supply security for its burgeoning middle class.
And Peru completes a nice growth triangle with Chile to the south and Brazil to the east, as the ancient home of the Incas will host traffic going from China to Brazil on Peru's stretch of the new Interoceanic Highway system. Peru is also upping its agricultural profile, and American guacamole lovers will be glad to know that Peruvian avocado imports may drive down prices for the tasty green paste by as much as 15% in the coming year.
With new money moving around inside each of these countries and around the region as a whole, my bet is that increasing numbers of Latin Americans will take to the skies.
Flying the South American Skies for the First Time
Rather than investing in avocados, sugar ethanol, or copper as individual sectors or stocks, you can tap a regional index fund like the SPDR S&P Emerging Latin America ETF (NYSE: GML). GML is heavy on financial stocks and energy — two sectors that are sure to grow as people buy new refrigerators, computers, and washing machines to put in the homes they've bought with expanded credit access. GML gained an impressive 83% in the past year, more than doubling the S&P 500 rally.
The Market Vectors Brazil Small-Cap ETF (NYSE: BRF), which aims to capitalize on smaller consumer-driven stocks, is up 206% over the same period!
Yet, the real story to me, someone who's traveled throughout the region, is travel itself. For example, most of the Brazilians I know who are part of the expanding consumer class have never flown on a plane; they haven't had a chance to explore their own country, let alone fly to Argentina or the United States.
So that's why we're seeing astonishing growth in Brazilian airlines TAM Linhas Aereas (NYSE: TAM) and Gol Linhas Aereas Inteligentes (NYSE: GOL), both of which trade handily on Wall Street as American Depositary Receipts.
TAM shares rose 15% from March 30 to April 6, bringing the company up to a 203% gain over just one year.
GOL did even better, soaring to 305% appreciation for shareholders from spring 2009 to now.
TAM and Gol are doing well despite each other's competition — or maybe because of it. A price war that began late last summer between the two carriers brought hundreds of thousands of new passengers on board, strengthening revenue while literally expediting the renewed flow of money in the region as the recession began to wane.
Brazilians flew with their money, and with 5.5% expected economic growth for Brazil in 2010, TAM is calling for another year of 14%-18% total growth in the Brazilian air market on top of the 18% increase in 2009.
Obviously, TAM chiefs think there are plenty of new butts they can still put in the seats.
Just for argument's sake, let's ask what if every Brazilian who wants to fly gets pulled into the market by low prices in the next couple of years? Well, there's still the 2014 World Cup and 2016 Olympics, and those mammoth sporting events are worldwide draws. To get around within Brazil, plenty of foreigners will fly TAM and Gol even if they came over on Continental or another big-name international carrier.
As it happens, Continental Airlines (NYSE: CAL) just pulled TAM into its OnePass frequent flyer program, meaning more non-Brazilians will have incentive to book flights on TAM.
Continental may not be a Latin American company, but this tie-up is certainly in keeping with the New Partnerships theme of the Cartagena World Economic Forum and the broader trend of increased movement that will lead to gains in consumer-oriented Latin ADRs.
And I think that even after triple-digit gains, we're only seeing the beginning of what these two Brazilian airlines could do for investors in the coming years.
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