Latin America's Emerging Superstar

09/23/2010 1:00 pm EST

Focus: FUNDS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of the Global Guru, says former pariah Colombia has become the best stock market in Latin America—maybe even the world—in a turnaround of epic proportions.

When you hear the name "Colombia," two other words probably spring to mind: "violence" and "drugs." Indeed, for most investors, it's hard to imagine Colombia as anything but a "Scarface"-style narco state.

Yet, this popular image of Colombia does not do the country justice for the progress that it's seen since the ascension of Álvaro Uribe, the country's tough and popular president, in 2002.

In the past eight years, Uribe has driven FARC, a group of leftist revolutionary guerillas, from heavily populated central Colombia to more remote, less threatening areas. Cocaine production has fallen by around half. Colombia's brightest citizens are no longer emigrating in droves. (Colombia’s new president, Juan Manuel Santos, who took office at the beginning of September, was Uribe’s former defense minister and is widely expected to continue his predecessor’s tough policies.—Editor)

Understanding the current state of play in Colombia—and how it is a terrific example of when countries get "less bad" that investors make the most money in global stock markets—could be the key to your making some terrific profits in this Latin American "turnaround play" over the coming years. (It has been the top-performing major stock market over the last decade, with a 38.6% annualized gain, as well as one of the big winners from the financial crisis—Editor.)

With a population of 44 million and an economy the size of Indiana, Colombia never will have the economic heft of larger rivals like Brazil and Mexico. That does not make its economic achievements less impressive. After battling double-digit inflation and 20% unemployment in the early part of the last decade, Colombia introduced economic reforms that have shrunk its national debt and kick-started economic growth.

By the end of this year, Colombia's net debt will still equal only about 38% of [gross domestic product]. That's less than half the level it was only four years ago and [less than half] where the United States and the United Kingdom will stand by the end of 2010.

With the economy expected to expand 2.5% this year, the governor of Colombia's central bank is lobbying for an investment-grade rating for Colombia—something Brazil achieved only in 2008. Ratings agency Standard & Poor's indicated it has been impressed by Colombia. But an upgrade isn't in the cards just quite yet.

Colombia is hardly paradise. But it is a much better place now than it was 20 or 30 years ago. Yet for all its achievements, Colombia is still a bit of a stock market pariah. Although Colombia is one of the largest economies in Latin America, neither the iShares S&P Latin America 40 Index ETF (NYSEArca: ILF) or SPDR S&P Emerging Latin America ETF (NYSEArca: GML) invests in Colombian stocks.

Colombia is also one of the few global markets that managed to maintain its momentum, with the benchmark IGBC Index hitting all-time highs [recently]. The Global X/InterBolsa FTSE Colombia 20 ETF (NYSEArca: GXG) has more than doubled since its launch—far outpacing the S&P 500, and outperforming even BRIC star Brazil.

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