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Not long after landing in the New World during the 15th century, European settlers sent back tantalizing rumors of the tremendous wealth and natural resources to be had in the Americas. Many claimed that the cities of the great Mayan and Incan empires were literally paved in gold. Kings and nobles, intoxicated by the allure of all that wealth, funded large fleets of ships and the expensive expeditions of the conquistadors in hopes of claiming the tremendous natural resources to be found in the region. Those early accounts from settlers weren't far off the mark -- Latin America is certainly a region of tremendous natural bounty. The continent has enormous reserves of copper, silver, gold, and iron ore, as well as crude oil and natural gas. All of these precious commodities are in high demand today. And the great fertile lands of modern-day Brazil and Argentina are perfect for raising crops and livestock -- Latin America remains a key breadbasket for the rest of the world. Of course, while most investors recognize Latin America's importance as a source of natural resources, the region has unfortunately earned a somewhat spotted reputation. Specifically, many of the larger economies in the region have at times been marred by political instability, high inflation and a devastating cycle of economic booms followed by crippling recessions. And on top of all that, political corruption has historically been an ongoing issue across much of the continent. But if you're ignoring Latin America's investment potential, then you're missing out on one of the most compelling economic growth stories on the planet. Latin America has changed for the better, and there is much more to the picture than just natural resources. Several key nations have seen significant economic liberalization in recent years. As a result, many regions throughout Latin America are enjoying a large-scale economic renaissance, falling inflation and increasing political stability. All of this should power tremendous returns for the well-placed investor. Unfortunately, the ill-conceived nationalization campaigns of Venezuelan President Hugo Chavez and Bolivian President Evo Morales have stolen the headlines and scared many investors away from Latin American growth. But these nations are more the exception than the rule. Just consider the case of Brazil... Brazil's Transformation Brazil has become the model of economic success for Latin America. However, when looking at the country's stellar growth and stability today, it's hard to imagine that as recently as 1994, Brazil was an economic disaster. As you can see from the chart below, the nation's monthly inflation averaged more than 38% in June of 1994, and the annual rate approached a staggering 5,000%. The country was also haunted by a bloated government sector given to profligate spending and an economy dominated by a host of inefficient, State-owned businesses. But Brazil began to take steps to improve the situation that year, enacting a series of economic reforms and stabilization measures called the Plano Real (Real Plan). The country introduced a new currency, the real, which was pegged to the U.S. dollar. That peg was partially lifted a few years later, although Brazil has continued to fight inflation and manipulate interest rates to maintain the currency's value. Just one year after inflation peaked, the annualized rate had dropped to around 33%. And three years later, inflation had plummeted to around 7%. In addition, under the government of Fernando Herique Cardoso, Brazil embarked on a privatization campaign. The government sold off airplane and defense company Embraer and iron ore giant Companhia Vale do Rio Doce, among a host of other former State-owned enterprises. Back in 2003, many worried that the country's new President, the left-leaning Luiz Inacio Lula da Silva, would reverse the reforms of his more right-wing predecessors in the late 1990's. After all, Lula was a prominent union activist and social agitator in his early career, and his Worker's Party wasn't known for being investor-friendly.  But
that didn't happen. The Lula government has continued to pursue a policy
of economic reform and fiscal discipline -- inflation has since fallen
steadily under his watch. In fact, the nation's Central Bank has
targeted (and so far maintained) an inflation rate of around 4.5% over
the period from 2007 to 2009.The Brazilian Growth Curve Meanwhile, Brazil even paid off a series of IMF loans, which were taken on during its period of economic instability, two years ahead of schedule. And under Lula, Brazil has remained largely in favor or free trade, both with other Latin American nations and with the developed world; relations with the U.S. remain solid. But economic reforms are more than just squeezing excessive inflation out of the system. True reform also leads to stronger economic growth, lower unemployment and a burgeoning consumer sector. Brazil has certainly seen all of that come to pass over the past decade. The country will likely see overall real Gross Domestic Product (GDP) growth of +4.7% in 2007, and most analysts are looking for growth rates to remain above +4.3% on average through the end of the decade. This is just a continuation of a strong growth curve that's been ongoing for years. And the Brazilian government has undertaken steps to help re-accelerate growth. The country has implemented the Programa de Aceleracao (PAC), designed to boost investment in basic infrastructure such as roads, rail networks and ports, via a series of tax breaks and direct spending. Poor infrastructure has hampered Brazil's growth and ability to export goods in recent years, and my staff and I expect improved infrastructure to help resolve that issue.  As
the economy has gradually improved, unemployment has also improved
markedly -- dropping from the mid-teens just five years ago to about 9%
today. And a healthier employment market has powered meaningful wage
growth and ignited the Brazilian consumer. As our chart illustrates,
retail sales have trended steadily higher since 2001.
This increase in
domestic demand will help reduce Brazil's dependence on export-led
growth. But that's not to say the export situation is poor. Follow the
Leader Important
Note: Throughout the remainder of this article, StreetAuthority
co-founder Paul Tracy and our research staff provide the names of
several dozen promising Latin American stocks. They also offer an
in-depth look at their six favorite investment ideas in this region.
However, in order to view the remainder of this article, you'll need to
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Paul Tracy founded StreetAuthority and became Chief Investment Strategist in 2001. Prior to that he spent several years as Managing Editor at a multi-million dollar financial publishing firm with over 150,000 subscribers. In addition to his role as managing editor and lead financial writer, he was also responsible for equity research and managing a team of seasoned professional financial writers, researchers and market commentators. Paul's previous experience includes a position at Robert W. Baird & Co.'s full-service brokerage operations as well as economic research work on a Money and Banking project funded by the National Bureau of Economic Research. He has also spent time doing outside consulting and research for the University of Virginia, has appeared as a guest expert on several prominent financial radio shows, and has been a featured speaker at various investment conferences across the U.S. Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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And
as you can see in our chart, global demand for all of these rich
commodities has added up to surging exports.
