Latin America’s largest economies, like Brazil, aren’t the ones that will be delivering the biggest stock gains this year. As measured by the iShares MSCI Brazil Index Fund (NYSEARCA:EWZ), equities in the region’s largest economy are extending last year’s glum pace as the exchange-traded fund (ETF) is off nearly 2% to start the year.
But while economies like Brazil and Argentina might not offer the best investments for 2013, there are some “unsung gems” that will deliver.
Here are some of the most promising Latin American names, both on the equity and debt fronts, that investors should consider this year.
Latin America’s Best Investments for 2013: Banking on Growth
At least one Latin American country is home to a sturdy, vibrant banking sector that has delivered stout returns to investors in recent years. That country is Chile and the way to play the durability and growth of Chilean banks is with Banco de Chile (NYSE:BCH).
With a market capitalization of just over $15 billion, Banco de Chile is dwarfed in size by U.S. equivalents such as Bank of America (NYSE:BAC) and Citigroup (NYSE:C). An important lesson to remember with bank stocks is that bigger is not always better. The global financial crisis proved as much.
Banco de Chile proves as much as well. In the past five years, the shares have nearly doubled. Earnings growth has averaged nearly 18% over the past decade. Those are important statistics, but they are not the only reasons to consider this stock.
Arguably the most overlooked, though highly important, catalyst for Chilean banks and financial services firms is a concept that many folks in the developed world may not comprehend. Public sector pensions are almost non-existent in Chile. As a result, the government has a mandatory savings plan for state workers. That means Chileans are big-time savers. In mid-2012, the savings rate there was nearly 22%.
Not only does this scenario increase the allure of Chilean banks from deposit-gathering point of view, but it shines a light on the potential of Chilean asset management business, an arena Banco de Chile operates in.
Put it this way: While no one can guarantee more Chilean asset management businesses will be acquired anytime soon, MetLife (NYSE:MET) shelled out $2 billion for AFP Provida SA (NYSE:PVD), a Chilean pension manager, earlier this year. Regardless of what Banco de Chile does with its asset management unit, it is clear that is a lucrative business for the bank.
One of the Best Bond Investments for 2013
This is how bad yields have gotten on U.S. government debt: The iShares Barclays TIPS Bond Fund (NYSEARCA:TIP), an ETF that investors have poured over $21.3 billion into, has a 30-day SEC yield ofnegative 4.43%.
While climbing only slightly higher up the risk ladder, investors can enjoy the benefits of a monthly dividend and a 30-day SEC yield of almost 4.7% with the Market Vectors LatAm Aggregate Bond ETF (NYSEARCA:BONO).
Those are not the only benefits of the unheralded BONO. As you may remember, PIMCO’s Bill Gross has noted that Brazilian and Mexican sovereign debt are among the “cleanest dirty shirts” out there. In fact, PIMCO is one of the largest holders of Mexican sovereign debt in the world. BONO’s devotes nearly 62% of its weight to Brazil and Mexico. In fact, nearly 15% of BONO’s weight is allocated to bonds denominated in Mexican pesos, of which Gross is quite a fan.
There is another potentially pleasant surprise within BONO that should not be overlooked. That is the ETF’s 11.3% weight to Colombia, South America’s second-largest economy. Although Colombia already has an investment-grade credit rating, the country wants to move further into that spectrum. In turn, that would lower its borrowing costs, forcing yields down on Colombian sovereigns while increasing the value of those bonds.
Increased oil output there has prompted a surge in tax collections meaning fiscal deficits have dwindled. And all of that means Colombia is a credible candidate for a ratings upgrade perhaps as soon as early in the second quarter. In other words, investors have a yield and capital appreciation play on their hands with BONO.
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