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Latin America’s Chile: A Top Stock Market Performer

March 25, 2010 by  

Latin America’s Chile: A Top Stock Market Performer

Headlines around the world are full of news about the aftermath of Chile taking a big hit Feb. 27 with a magnitude 8.8 earthquake, the fifth-strongest ever measured in the country. The good news is Chile’s capital, Santiago, is located about 200 miles northeast of the quake’s epicenter and avoided the worst of the disaster. The airport had resumed operations and several shops were open for business on the Monday following the weekend earthquake. In addition, the Chilean stock market was back online March 1 without a hitch.

Indeed, iShares MSCI Chile Investable Mkt Idx (ECH) jumped 4.46 percent during the week following the earthquake, as the powerful temblor barely registered as a blip on Chile’s stock exchange. Chile’s stock exchange proved to be as robust as most of Chile’s rigorously constructed buildings.

Chile: Free Market Reforms + Discipline = Economic Success
Unlike Greece or other countries on Europe’s periphery, Chile has been a model for how a small developing country should conduct its economic affairs. This country of nearly 17 million people, with an economy about the size of Alabama, is arguably the most economically successful and certainly, on a per capita basis, the wealthiest country in Latin America.

Understanding the reasons behind Chile’s economic success can help you identify other countries in the world that are getting the basics right—and, like Chile, are the source of stock market profits that put the United States S&P 500 to shame.

Despite its impressive achievements, Chile’s success has been a quiet one, with few countries seeking to duplicate the “Chilean Miracle.” Chile first introduced free market-oriented reforms with the help of the “Chicago Boys”—a group of University of Chicago-trained economists—during the bad old days of August Pinochet’s military government in the 1970s. The first democratic government of Patricio Aylwin—which took over from the military in 1990—continued with these economic reforms, as have successive governments since then. The impact of these reforms became crystal clear as Chile’s economic growth rates began to outpace that of its Latin American rivals virtually overnight.

Chart for iShares S&P Latin America 40 Index (ILF)

Chile’s growth in real gross domestic product (GDP) averaged 8 percent during the period 1991-1997, rivaling that of the Asian Tigers. Although it fell to half that level after the Asian financial crisis in 1998, Chile’s economy recovered, boasting growth rates of 5 percent to 7 percent for most of the past decade—considerably outstripping growth rates in neighboring Brazil. By 2006, Chile had the highest nominal GDP per capita in Latin America. And recently, it was the first Latin American country to join the Organisation for Economic Co-operation and Development (OECD), an exclusive club of “developed nations.”

What’s most impressive about Chile is that it has stuck to its reforms through thick and thin—a discipline that is sorely lacking in recent U.S. administrations. After being elected in 2006, President Michelle Bachelet took a lot of flack when she failed to succumb to pressure to spend Chile’s windfall earnings from high copper prices. The “Great Recession” of 2008 and 2009 revealed the wisdom of her policies. When the global financial crisis set in, government coffers had the cash to implement one of the world’s largest stimulus plans. The ant prevailed over the grasshopper yet again.

Skeptics point out that for all the importance of free-market reforms, Chile wouldn’t be this far along without its huge reserves of copper. Copper accounts for about one-third of the government’s revenue and, as the world’s third-biggest producer of copper, even a small stumble in Chile’s copper production due to the recent earthquake sent global copper prices soaring.

But ideas do matter. What copper is to Chile, oil is to Venezuela. Yet, Venezuela is an economic basket case. Contrast the economic fates of Latin American countries that invoked the name of Che Guevara (Cuba, Venezuela) with the economic views of Milton Friedman and the “Chicago Boys” (Chile) during the past 40 years and you can see why Chile has become a poster child for free-market reforms. As the late, great Jim Rohn observed, “People aren’t building rafts to escape to Cuba.”

Chile: Consistently Hot
While most global stock markets go in and out of fashion, Chile has been the single most consistent performer among all global markets over the past decade. It has ranked as the third-best performing market in the world for each of the last 10 years, three years and year-to-date.

Sadly, U.S investors did not have a chance to profit directly from the Chilean index’s performance until the launch of the iShares MSCI Chile Investable Mkt Idx (ECH) in November of 2007.

But had you invested $10,000 in the iShares MSCI Chile Investable Mkt Idx (ECH) on the date of its launch on Nov. 20, 2007, you’d be sitting on $12,001—a solid 20 percent gain. Had you invested that same amount into the S&P 500, you’d have only $8,685. That’s a remarkable 38 percent difference over the span of only 27 months.

iShares MSCI Chile Investable Mkt Idx (ECH)

Chile also has been a star this year among emerging markets, up 6.9 percent so far, the top performer in Latin America, even as the overall MSCI Emerging Markets Index has dropped 5.4 percent.

Bottom line? Chile may sell off briefly after the devastating earthquake but I believe that Chilean equities will recover soon and will continue to be among the top stock-market performers for the coming decade.

—Nicholas A. Vardy
Editor, The Global Guru

Nicholas Vardy

is best known for his unique expertise in global investing. He is the editor of Global Bull Market Alert, Global Stock Investor, and The Global Guru, a free weekly e-letter with more than 165,000 subscribers, all published by Eagle Publishing. He is also CIO of Global Guru Capital (www.globalgurucap.com) and founder of the London Junto (www.londonjunto.com), a regular gathering where leading London hedge fund managers meet to debate the top investment issues of the day. Mr. Vardy has been quoted in the Wall Street Journal, Newsweek, Investors Business Daily, MSN Money Central, AOL, Yahoo Finance, and CBS MarketWatch. He has also been regular contributor to the Fox Business Network and CNN International. He is a Chartered Financial Analyst and a graduate of Stanford University and Harvard Law School as well as a former Fulbright scholar.

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