Chile on My Radar

 | May 29, 2012 | 7:00 PM EDT  | Comments
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For investors who have been watching from the sidelines, the last few weeks have probably been quite satisfying. After all, risky asset classes have dipped considerably, creating some potentially interesting buying opportunities for those sitting on dry powder. I expect the bargain hunters to come out in full force this week. After some steep selloffs, many asset classes are sporting relatively attractive prices. One of the most attractive lies a few thousand miles to the south: a red-hot South American economy that is a lot cheaper now than it was at the beginning of the month, and is poised to deliver attractive risk-adjusted returns going forward.

The iShares MSCI Chile Index Fund (ECH) has been one of the hardest-hit during the recent downturn. This fund has shed about 12% of its value over the last four weeks, including a dip of about 9% during the past ten trading sessions. Chile has been absolutely hammered by risk aversion and anxiety over the future of the eurozone, and this indiscriminate selling has created an attractive buying opportunity for a market that has a great deal of upside potential in the next few years.

I'm under no illusion about the potential impact that the eurozone's current woes could have on Chile. Besides the direct trade between the regions, the indirect pinch from weakness in commodity prices could present problems. Further, if anxiety pushes up the value of the U.S. dollar relative to "risky" emerging market currencies, U.S.-based investors could see their returns in Chilean stocks diminished considerably.

Even acknowledging these meaningful risks, however, there is still a lot to like about Chile. After a big selloff recently, Chilean stocks are cheap: The ECH has a price-to-earnings ratio of about 21x, putting it at about the same level as the S&P 500. But Chile comes with much higher expected returns, especially over the short term. Chile posted gross domestic product growth of about 5.6% in the first quarter of the year, and the economy is expected to expand by 4% to 5% for all of 2012. Compared with the dismal prospects for growth here in U.S., that range is incredibly attractive.

I'm also of the belief that Chile is a relative safe haven that's better-prepared than most to weather any economic uncertainty that lies ahead. Many investors share the misguided notion than South American governments play fast and loose with any extra cash, maintaining suboptimal fiscal and monetary policies that introduce additional risk factors. In reality, Chile serves as a role model in the area of fiscal discipline. The country has taken advantage of a prolonged period of rising commodity prices to beef up reserves in case further stimulus is needed in the years ahead. Chile's fiscal footing is about as stable as it gets for commodity-intensive economies. If anything, the sound policies enacted and carried out over the last few years have reduced overall risk for Chilean stocks.

There may be some bumps along the way and more short-term volatility coming for all emerging markets, Chile included. But the strong underlying fundamentals, coupled with the latest dip in prices, creates a great opportunity for those with a bit of risk tolerance. ECH may seesaw in coming sessions as the drama in Europe continues to play out. But I'm almost certain this fund will be worth more one year from now than it is today, and that in three years it could come close to doubling. In my book, that's a great opportunity -- one that's worth a bit of risk.

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