Chilling in Chile, Braving Brazil

06/03/2009 7:02 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

The Chile Fund and the Market Vectors Brazil Small Cap ETF offer value off the beaten path, writes Carlton T. Delfeld in the Chartwell Global ETF Investor.

Chile and the Chile Fund (NYSE: CH) offer investors the opportunity of gains from a country that has weathered the current global economic meltdown better than most. It is politically stable, resource rich, and fiscally conservative.

CH was down 52% in 2008, but has come back nicely this year. (It was recently trading at a 7% discount to net asset value—Editor.) Roughly 38% of this closed-end fund’s exposure is to the utilities sector, with an additional 32% to materials and oil and gas. Copper, of course, is a big export and at the core of the economy, though Chile like Norway has been smart to put bonanza copper revenue into a rainy-day fund.

The national copper company, Codelco, controls more than 20% of the world's copper reserves. Chile’s national debt is only 4% of gross domestic product (GDP), and its sovereign wealth fund tops $20 billion. In addition, Chile’s announced $4-billion economic stimulus package packs some punch, being equal to 3% of GDP. Chile [also has] a plethora of free-trade agreements with countries such as the US, the European Union, China, Japan, Canada, and South Korea. Chile depends on exports for 43% of its GDP.

Chile is starting to attract some attention as it claws back some of the losses from 2008 and is a sensible bet on an improving trade picture and commodities pricing. The risk factor is medium to high. I suggest an 8% trailing stop-loss. You may wish to couple CH with my favorite stock pick, Sociedad Quimica y Minera, known as Chemical and Mining Company of Chile (NYSE: SQM).

[Elsewhere in Latin America,] the Market Vectors Brazil Small Cap ETF (NYSE: BRF) is an intriguing alternative to the popular large cap-oriented iShares MSCI Brazil Fund (EWZ). EWZ is very much oriented towards the energy and materials sector, and trades very similarly to the iShares S&P Global Materials Sector Index Fund (MXI).

BRF may be preferable in two ways. First, [it] should avoid being primarily a commodity play and the booms and busts that go with this sector. Second, BRF allows a much better and cleaner play on the key Brazil consumer/middle class growth story, since 40% of its allocation is to the consumer staples and consumer discretionary sectors.

The gross expense ratio of the fund is a bit high at 1%, but it [did] sport a nice 4% dividend [at the end of April] and there are not a lot of options to get at Brazilian companies with an average market capitalization of $1.3 billion.

The risk factor is high, given the relatively high valuations in Brazil, so I suggest an 8% trailing stop loss.

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