Latin America’s Chile: A Top Stock Market Performer

It was only 1o months ago that Chile was hit by a magnitude 8.8 earthquake, the fifth-strongest ever measured in the country. The good news is Chile’s capital, Santiago, located about 200 miles northeast of the quake’s epicenter, avoided the worst of the disaster. Electricity was quickly restored to 80% of the city. The airportresumed operations and several shops opened for business on within a day. The Chilean stock market resumed its relentless trek upward without a hitch.

Chile: Free Market Reforms + Discipline = Economic Success

Unlike Greece or other countries on Europe’s periphery, Chile has been a model for how a small developing country should conduct its economic affairs. This country of nearly 17 million people, with an economy about the size of Alabama, is arguably the most economically successful and certainly, on a per capita basis, the wealthiest country in Latin America.

Understanding the reasons behind Chile’s economic success can help you identify other countries in the world that are getting the basics right — and, like Chile, are the source of stock market profits that put the U.S. S&P 500 to shame.

Despite its impressive achievements, Chile’s success has been a quiet one, with few countries seeking to duplicate the “Chilean Miracle.” Chile first introduced free market-oriented reforms with the help of the “Chicago Boys” — a group of University of Chicago-trained economists — during the bad old days of August Pinochet’s military government in the 1970s. The first democratic government of Patricio Aylwin — which took over from the military in 1990 — continued with these economic reforms, as have successive governments since then. The impact of these reforms became crystal clear as Chile’s economic growth rates began to outpace that of its Latin American rivals almost overnight.

Chile’s growth in real GDP averaged 8% during 1991-1997, rivaling that of the Asian Tigers. Although it fell to half that level after the Asian financial crisis in 1998, Chile’s economy recovered, boasting growth rates of 5-7% for most of the past decade — considerably outstripping growth rates in neighboring Brazil. By 2006, Chile had the highest nominal GDP per capita in Latin America. And recently, it was the first Latin American country to join the OECD, an exclusive club of “developed nations.”

What’s most impressive about Chile is that it has stuck to its reforms through thick and thin — a discipline that is sorely lacking in recent U.S. administrations. After being elected in 2006, President Bachelet took a lot of flack when she failed to succumb to pressure to spend Chile’s windfall earnings from high copper prices. The “Great Recession” of 2008 and 2009 revealed the wisdom of her policies. When the global financial crisis set in, government coffers had the cash to implement one of the world’s largest stimulus plans. The ant prevailed over the grasshopper, yet again.

Skeptics point out that for all the importance of free-market reforms, Chile wouldn’t be this far along without its huge reserves of copper. Copper accounts for about one-third of the government’s revenue and, as the world’s third-biggest producer of copper, even a small stumble in Chile’s copper production due to the recent earthquake sent global copper prices soaring.

But ideas do matter. What copper is to Chile, oil is to Venezuela. Yet, Venezuela is an economic basket case. Contrast the economic fates of Latin American countries that invoked the name of Che Guevara (Cuba, Venezuela) with the economic views of Milton Friedman and the “Chicago Boys” (Chile) during the past 40 years, and you can see why Chile has become a poster child for free market reforms. As the late, great Jim Rohn observed, “People aren’t building rafts to escape to Cuba.”

Chile: Consistently Hot

While most global stock markets go in and out of fashion, Chile has been the single, most consistent performer among all global markets over the past decade. It has ranked as the third-best performing market in the world for each of the last 10 years, 3 years and year-to-date.

Sadly, U.S investors have not profited directly from the Chilean index’s performance, until the launch of the iShares MSCI Chile Investable Mkt Idx (ECH) in November of 2007.

But had you invested $10,000 in the iShares MSCI Chile Investable Mkt Idx (ECH) on the date of its launch on November 20, 2007, you’d be sitting on $12,001 — a solid 20% gain. Had you invested that same amount into the S&P 500, you’d have only $8,685. That’s a remarkable 38% difference over the span of only 27 months.

Chile also has been a star this year among emerging markets, up 6.9% so far, the top performer in Latin America, even as the overall MSCI Emerging Markets Index has dropped 5.4%.

Bottom line? Chile may sell-off in the next few days after its devastating earthquake. But I believe that Chilean equities will soon find their feet, and will be among the top stock-market performers for the coming decade.

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