If I asked you to guess which country has the strongest bond rating in South America, many of you would probably say Brazil. After all, the country is becoming an economic powerhouse, infrastructure spending there is exploding in preparation for the 2014 FIFA World Cup and the 2016 Summer Olympic Games in Rio de Janeiro, and I keep hearing about Brazilian millionaires buying up real estate in the United States and Europe.
But in terms of bond rating and other important economic measures, Brazil takes a back seat to a neighbor that gets much less publicity: Chile.
Chile has a market-oriented economy and strong financial institutions. Its rule-based countercyclical fiscal policy accumulates surpluses in sovereign wealth funds during periods of strong economic growth, and its public debt is only 10 percent of GDP. Because of these sound policies, Chile’s economy expanded at an average rate of 5.5 percent between 1990 and 2007. Even last year, when Europe dipped back into recession and Chinese growth slowed, Chile maintained a growth rate of 5.6 percent.
So it’s no surprise that Chile has earned an A+ credit rating from Standard & Poor’s.
An Attractive Investment Option and Trading Partner
|Chile’s economic freedom and rule of law has made it the world’s leading trading partner.|
Chile’s economic strength is not going unnoticed by investors. In 2010, the country’s foreign direct investment inflows quadrupled to around $15 billion. And as of November 2011, the value of Chile’s sovereign wealth funds amounted to more than $18 billion.
But it’s not just investors paying attention. Chile now has 59 bilateral and regional trade agreements — more than any other country in the world, including China, India, South Korea, Mexico, and even the European Union!
What makes Chile so attractive as a trading partner? Among other things, the answer is its economic freedom and rule of law. Chile has an independent, efficient, and transparent judicial system; and strong protections of property, patents and copyrights, consistent with the new Trademark Law Treaty.
Chile’s Reliance on Dr. Copper
Most of Chile’s wealth is due to copper. The commodity accounts for 60 percent of Chile’s exports, and royalty taxes on copper mining provide about one-third of the country’s fiscal revenues. Chile’s government owns and operates Codelco, the largest copper miner in the world, ensuring that the country’s mineral wealth stays within its own borders.
Copper is one of the major building blocks of the global economy. It’s needed to build homes and factories, produce electronics, and generate and transmit electricity. For this reason, copper is often viewed as a reliable leading indicator of economic growth. Some people even say it has a Ph.D. in economics, and call it Dr. Copper.
Copper prices generally rise and fall along with global demand. And since Chile is so reliant on copper, its stock market often mirrors the commodity’s performance.
Copper peaked at nearly $4 per pound in February 2012, and then pulled back for more than a year as global economic growth slowed, eventually hitting a low of $3.06 per pound in early April. But over the past few weeks, copper has bounced off that low, as demand from China began picking up again.
Chile’s stock market has also turned higher, and looks attractive at current prices. The best way to get exposure to a broad range of Chilean equities is with the iShares MSCI Chile ETF (ECH).
Most commodities have entered a downward trend. But because of copper’s Ph.D. in economics, it will likely lead the way if that trend turns around. And one way to get in on the ground floor of a rising copper market is with this play on Chilean stocks.