Since March, a massive rally has been in play in the U.S. equity markets.
Despite that the S&P 500 has gained approximately 40 percent from its lows, investing in the United States hasn't been the best place to make your money grow. Year to date, the S&P 500 is only up around 5 percent while the Dollar Index is down 4 percent.
In real terms, investors who entered the market at the beginning of the year have made zilch.
On the other hand, emerging markets are making huge gains this year, gaining from higher stock prices and stronger currencies. Also, commodities have rebounded sharply from their lows and seem to have bottomed.
Why is this occurring?
Worldwide, central bankers have cut interest rates to historic lows and money printing is at full speed. In this economic environment, which creates inflationary pressures, cash and bonds become unattractive and money seeks good fundamentals and higher yields. Also, expectations of an economic recovery this year make cyclical markets and assets the biggest gainers.
Emerging markets are rich in natural resources, which always maintain an intrinsic value. Productive jobs and industrial capacity that the United States lost during the last decade due to the housing bubble has shifted into these countries.
In contrast, the United States continues to stimulate a credit-and-consumption economy and a growing government that burdens economic growth with mammoth deficits.
In emerging markets fundamentals are good, banks are free of toxic debt, and assets prices fell in sympathy with U.S. markets last year giving investors good opportunities to buy stocks at fire sale prices. It is logical that money is flowing into these countries.
One specific way to participate in emerging markets is investing in Chile.
Chile is a major exporter of copper and an important producer of molybdenum, cellulose, fertilizers, wine, wood and grapes. It is also an important exporter of industrial products, which constitute about 30 percent of the country’s exports. The Chilean economy’s growth thus is correlated with Asian growth and with commodity prices.
Between 1990 and 2008 Chile’s GDP grew at a rate of 5.3 percent while the per capita income has more than tripled. Based on a free market economy and high political stability, Chile also has engaged during the last two decades on a series of free trade treaties that have stimulated the economy.
Chile has strived to maintain constant fiscal and trade surpluses, low levels of external debt, high credit ratings, controlled inflation, and expanding currency reserves.
The Chilean stock market, tracked by the IPSA index, has vastly outperformed the S&P 500, especially during the last two years. In the brutal bear market of 2008, the IPSA only declined by 21 percent while this year it’s up by 33 percent. This year, the Chilean peso is also up against the dollar by almost 15 percent, which further boosts the gains of investors in this market.
The market seems to have resumed its long-term uptrend. Strong economic growth in Asia and rising commodity prices will spur growth in the Chilean economy.
Plus, massive money printing and stimulus in the United States, which will not stop in any foreseeable future, continue to make of Chile an attractive place to invest as an inflation hedge.
All these factors lead me to believe that the market should continue to climb higher.
To participate in this market, you can buy the iShares MSCI Chile Investable Market Index Fund (ECH) which tracks the local stock market. Buying a dip on a correction would be the best way to enter.
You can also dabble in individual Chilean stocks, which I will highlight from time to time in this column.
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