South America’s Hidden Treasure

12/13/2010 2:06 pm EST


Carla Pasternak

Editor, The Income Investor

Argentina has transformed itself from basket case to horn of plenty, writes Carla Pasternak, director of income research for High-Yield International.

My search for the world's best income hotspots has led me to one spot in South America that looks unrivaled for its combination of yields and growth.

This country has the fastest-growing economy in the region. Experts peg its gross domestic product growth this year at more than 8%. JPMorgan just upped its growth estimate to nearly 10%. That's twice the rate of better-known spots like Chile and Brazil.

This "miracle" country is growing faster than its neighbors because it doesn't rely on the US for growth. The economy is more reliant on exports of mainly food and fuel to Latin American neighbors.

And while fast-growing economies often attract hordes of investors, that's not the case here. In fact, the benchmark stock index has returned 31% so far this year. Compare that to Chile. Chile's economy grew half as fast, but its stocks have returned 37%. So while the economy is booming, there are still reasonable valuations.

The booming country I'm talking about is Argentina.

Not only is the nation growing at a tremendous clip, but I've found yields approaching 9% as well.

Once Burned, Twice Shy
So why aren't more investors flocking to Argentina? One reason is its troubled history. At one time, it was one of the more wealthy countries in the world. But that all changed in the 1990s. Argentina's economy faltered. In 2001, the country even defaulted on $95 billion of debt. Unemployment soared to 25% and the Argentine peso collapsed against the dollar. [For more on Argentina’s recent history, see Igor Greenwald’s recent column—Editor.]

The good news is all that is in the past. Argentina is in the midst of an economic revival. The nation produced five straight years of 9% GDP growth through 2007 and even managed to eke out gains during the global recession.

I am keeping an eye on Argentina's inflation; it's a natural byproduct of such rapid growth. Inflation in Argentina rose to an annual pace of 11.2% in July—its highest level in four years. This was the official rate the government published, but some estimate the actual rate was closer to 25%.
Argentina tolerates some inflation as a trade-off for higher growth, and I'll keep watching it. But when you consider the risk of just investing in the United States alone, that inflation looks less scary.

Making Old Debts Disappear
Consider that Argentina enjoyed a budget surplus of 0.5% of GDP late last year, while debt-to-GDP was only 49%. By comparison, the U.S. has a deficit of 9% of GDP and debt-to-GDP of 83% in 2009. Unemployment in Argentina of 7.9% in June is also considerably less than our 9.8%. When put in those terms, the real risk seems to be not expanding your horizons beyond the United States.

And it has taken a decade, but Argentina is finally regaining credibility with investors. This June, the government repaid nearly all of Argentina's outstanding debt that defaulted in 2001, including interest. [The debts were settled at approximately 33 cents per dollar of face value—Editor.] Credit agency Fitch recently upgraded the rating on Argentina's government bonds from "B-" to "B." That's still speculative, but on the right track.

But we care about yields, so where do you find income plays in developing countries like Argentina?

Follow the Money to Banks and Telecoms
I usually start my search with the telecoms. Just like at home, these can be dividend stalwarts in foreign countries. And with economic development, many foreign telecoms are seeing rising earnings thanks to broadband services.

I also like to study the banks. Banks are on the front line of growing economies. Thriving businesses need loans to expand their operations and more consumers begin borrowing to purchase homes, cars and other big ticket items. In other words, the banks can make money hand over fist, and they're typically generous in paying their earnings to investors as dividends. For example, Argentine bank BBVA Banco Frances (NYSE: BFR) trades in the US and is paying close to 6% to stateside investors.

[Pasternak recently recommended a high-yielding Brazilian utility as well as a Chile-focused fund and a Santiago bank. Paul Goodwin recently profiled a Colombian bank riding the same continent-wide bull market—Editor.]

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