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Four Ways to Profit From the World’s Shrewdest Government

Companies / Investing 2010 Dec 22, 2009 - 07:55 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleMartin Hutchinson writes: Three powerful investment trends will separate the winners from the losers in the new year.

  • Global commodities prices will continue to move higher.
  • Emerging economies will outgrow their richer, more-mature counterparts.
  • And the countries that were stingy with their monetary and fiscal bailout plans will now reap the benefits; they will outpace the countries that slashed their interest rates to zero and allowed their deficits to soar.

One country is poised to profit from all three of those trends. What's more, the political worries that always seem to diminish its allure to investors are poised to recede, making this emerging southern hemisphere heavyweight one of the premiere profit opportunities for 2010.

I'm talking about Chile.

Political Changes Pack a Profit Punch

The politics are the most recent development. Chile held the first round of its presidential election on Dec. 13, and right-wing candidate Sebastian Piñera won 44% of the vote. More importantly, the two furthest-left candidates were knocked out so the run-off on Jan. 17 will be between Piñera and the center-left Eduardo Frei, who got 30%.

Frei was already president once, in the late 1990s. At that time, he pursued a moderate pro-business course, certainly somewhat to the right of the outgoing President Michelle Bachelet. So Chile's politics are likely to become at least mildly more pro-business and possibly much more so.

Since the country - even under President Bachelet - was already the best-run country in Latin America (you can sensibly argue for Alvaro Uribe's Colombia, but not really Luiz Inácio Lula da Silva's Brazil when you look closely), that's really very good news, indeed.

But here's the real kicker: If just a few other factors shift from neutral to favorable, it could lead to some stellar growth as global investors choose Chile as their Latin American base.

The World's Shrewdest Government?

Chile is the world's largest producer of copper, accounting for a full third - and perhaps a bit more - of the world's total output. Since the price of copper zoomed 115% so far this year, that market muscle translated into a strong 2009.

Naturally, Chile's dominance in copper makes the country vulnerable if copper prices drop. So during the years of boom and high copper prices before 2008, the country and its leadership shrewdly and wisely created a "rainy day" fund it could use when copper prices slump.

That fund is worth $19.5 billion - the equivalent of 10.5% of Chile's gross domestic product (GDP). And it's already paying dividends.

In the last quarter of 2008 copper prices dropped, so Chile undertook a "stimulus" of 2.5% of GDP - an easily affordable bargain under the circumstances. The budget deficit is 4% of GDP because of the recession, but that's easy to deal with: Thanks to the forward-thinking, there's no budget problem to speak of.

If only all the governments around the world were this shrewd...

The team of forecasters assembled by The Economist estimates that Chilean GDP will have dropped by 1.2% in 2009. But the forecast says the country's economy will rebound smartly in the New Year - and will advance at a healthy 3.5% clip in 2010. And with copper prices high, that would well be an underestimate.

Chile is sitting in the exact sweet spot of the current recovery, and is well worth some investment. Because of the country's relative stability, however, the market is not especially cheap, trading at 17.6 times earnings. But it is cheaper than the U.S. Standard & Poor's 500 Index, which is trading at 18.6 times earnings.

Despite its small size - or perhaps because of it - Chile has tried to be as open as possible to foreign investment capital. That's been true since the 1980s, which is why there are more than a dozen Chilean stocks that trade on the New York Stock Exchange as American Depository Receipts (ADRs).

Let's look at four with the best outlooks:

  • Banco de Chile SA (NYSE ADR: BCH): Banco de Chile is the country's largest bank. It is controlled by Quiñenco SA, part of the Luksic Group of companies, and has branches in Argentina, Brazil, Mexico and the United States. The company trades at 14 times projected 2009 earnings, with a dividend yield of 4.5%. Since Chile hasn't had a deep recession, banking remains a good business, although 2009 earnings were down.
  • CorpBanca SA (NYSE ADR : BCA): Although CorpBanca is on the fifth-largest bank in Chile, it is consistently the most profitable. Currently, CorpBanca's ADRs trade at only nine times earnings, and feature a dividend yield of 3.6%. Third-quarter earnings were up 8% from the second quarter, so the shares seem very reasonably priced.
  • Lan Airlines SA (NYSE ADR : LFL): Normally I'd suggest you were mad to invest in an airline (a business that has lost money worldwide over the entire 106 years since the Wright Brothers first flew at Kitty Hawk). In the near term, LFL shares remain pricey: It's been a tough year for their airline, and the shares are trading at about 30 times projected earnings. LFL, which is currently trading at 30 times prospective earnings, does make money. And over the long haul, Chile's long, thin shape, remoteness and abundance of mountains make air travel both within the country and internationally a profitable business. The ADRs feature a 2.6% dividend yield.
  • Vina Concha y Toro SA (NYSEADR : VCO): I can't help it, I like the product - Vina Concha is Chile's largest wine producer. Chile was the only country in the world whose grapes were not infected by the Great Phylloxera Blight of 1873. Therefore, wine snobs can claim that Chilean wines - being made with pre-Blight grapes - are the best in the world. The market seems to buy this sales pitch, since the stock trades at 17 times projected 2009 earnings.
[ Editor's Note : As this article underscores, Martin Hutchinson scours the globe in search of the "hyper-profitable" investment plays that he recommends for his Permanent Wealth Investor trading service.

But that's not a surprise. Hutchinson's experience as an international investment banker took him to major markets such as Great Britain and the United States - and to smaller ones such as Macedonia. No matter where Hutchinson traveled, he always found one commonality - no matter what the market's size, he was always able to uncover the most profitable investment opportunities.

In a new report, in fact, Hutchinson not only uncovers the very best profit opportunities available today, he guarantees triple-digit gains. To check out this report - and these new investment picks - please click here.]


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