Red Hot Chile

01/07/2010 1:00 pm EST

Focus: ETFS

John Christy

Founding Editor, Forbes International Investment Report

John Christy, editor of Forbes International Investment Report, says emerging markets should remain strong in 2010, and Chile offers growth and stability, too.

Boy, was it a great year to be an emerging market investor!

Morgan Stanley’s flagship Emerging Markets index [ended] the year with a 70%+ gain. The BRIC markets (Brazil, Russia, India, and China) [did] even better, up 85% since the start of the year.

[But] it’s very hard to make the emerging market “bubble” case when you’re at a historical midpoint of valuations and global economic fundamentals keep trending higher.

The bad news is that all of this points to an easy pair of predictions for 2010. First, it’s almost certain that we won’t see another 70% year for emerging markets in the year ahead.

It’s also a reasonable assumption that there will be a lot more dispersion, and being in the right countries will make a big difference.

With a total market capitalization of about $200 billion—roughly the size of Wal-Mart Stores’ (NYSE: WMT) market value—Chile isn’t exactly the world’s largest equity market.

But Chilean stocks rose more than 60% in 2009. And there are a lot of reasons why this tiny Latin market may be an attractive investment destination in 2010.

First, Chile is one of those markets that still falls under the “emerging markets” umbrella, but is a lot more stable than you might think. With per-capita gross domestic product of about $10,000, it is one of Latin America’s richest economies. It has stable government finances, typically running a budget surplus.

Chile’s current account balance is a positive 1.3% of GDP. The currency, the Chilean peso, has been stable. If you are worried about things getting a little rocky again in 2010, then a strong economy like Chile should hold up better than most markets from a macro perspective.

On the other hand, if you believe that global growth will be more robust in 2010, Chile also wins. Almost any scenario featuring strong economic growth bodes extremely well for Chile’s largest export: copper. According to Credit Suisse, Chilean GDP growth should be a solid 5% in 2010.

While it’s possible to do your own stock-picking in Chile, the easiest way to play it is with the ETF iShares MSCI Chile Investable Market Index (NYSE: ECH). The fund offers broad exposure to 34 stocks, with the bulk of exposure in the utility sector (28.5% of assets); materials (20.3%); industrials (19.8%); financials (9.3%), and consumer staples (9.1%).

With several strong banks such as Banco Santander-Chile (NYSE: SAN), the fund’s financial holdings are arguably more solid than some of the banks you might find in the US or Europe.

The fund’s P/E ratio of 26x is a bit on the high side, but this is somewhat distorted by weak earnings in its more economically sensitive holdings. At 2.4x book value, the Chile ETF looks reasonably priced. All emerging market investing involves risk, of course, but Chile is arguably one of the more stable opportunities out there.

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