Emerging Markets: Profiles in (Investor) Courage - South America

Joel Anderson |

Investing in emerging markets can be scary. For all the joy big returns can bring, potentially unstable governments, relatively iffy monetary policy, and massive volatility makes it not for the faint of heart. For all the ups and down experienced by small-cap investors in America, you don't really have to worry about a coup replacing the President. A two-week government shut down and an insane game of chicken with defaulting on government debt, sure, but not a coup.

However, for the adventerous investor ready to ride the peaks and valleys, one place to go shopping in search of big returns is in and around the Andes. South America presents an intriguing emerging markets play, one that's close to home and has displayed relative political stability in recent years. Here's a quick look at the three major markets that are the largest on the continent.


Brazil represents the world's sixth largest economy by nominal GDP (estimated to clear $2.5 trillion by the end of the year) and its seventh by purchasing power parity. The country's primary stock exchange, Sao Paolo's BM&F Bovespa, is the 8th largest in the world with a total market capitalization of $1.22 trillion. There are 381 companies traded on the exchange, and the Indice Bovespa is its primary benchmark.

Brazil's primary exports include iron ore (of which it's the world's second largest producer), oil, raw sugar cane, and soy beans. Brazil's industrial sector is the second-largest in the Americas and accounts for 28.5 percent of its GDP. The nation's also laid extensive broadband cables and gone to great lengths to limit its dependence on foreign oil,achieving oil independence in 2006. It's among the world's biggest producers of hydroelectric power, with a capacity of 58,000 MW representing the source for 92 percent of the country's electricity. The 12,600 MW Itaipu Dam on the Parana River is the world's largest. Brazil's also a major ethanol producer, producing more than Asia and Europe combined.

With any number of potentially profitable plays available for the investor looking to Brazil, and an economy most analysts see destined to be among the five largest in the world in the next few decades after average GDP growth of 4-5 percent fro 2004-2008, the real question becomes one of stability. And Brazil may offer more a mixed bag there. In 1994, the country created the real, its currency, in a massive economic experiment meant to curb decades of hyper inflation. Against all odds, it worked, and since 1999 the country's currency has remained stable. Now, Brazil appears headed towards bigger, better things, with both the World Cup and the Olympics coming to Brazil before the end of the decade. And with it has come a big, fat, steaming helping of civil unrest to protest the massive income inequality. 


After Brazil, the rest of the continent is also-rans. But then, if you've ever looked at a map of South America, that should be pretty obvious. With a nominal GDP of over $475 billion, Argentina is the second-largest economy in South America and the 26th-largest in the world. Argentina's economy is growing, though, and growing fast, averaging 9 percent GDP growth a year from 2003 to 2007. While growth plummeted to 0.8 percent during the recession from 2007-2010, it's bounced back since then, returning to 9 percent growth in 2010 and 2011 before a series of macroeconomic factors knocked it back to 1.9 percent in 2012.

Argentina's biggest asset comes in the form of its natural resources. It's already one of the world's leading exporters of beef, citrus, and corn. And mineral deposits in the Andes are rich with various metals, including lead, zinc, silver, tin, copper, uranium and, yes, there's gold in them thar hills. However, what could really have investors drooling is its potential for natural gas production. With 774 trillion cubic feet of technically recoverable shale gas resources, it has the potential to be among the world's largest natural gas producers.

Argentina's future is tied tightly to that of Brazil, the source of almost 20 percent of its exports and over a quarter of its imports. However, the country's highly educated and natural resources could 


Colombia's GDP of $365 billion is enough to make it the third largest in South America. However, it's GDP per capita of just over $6,000 comes in at a little over half of that of Brazil. The country's economy is driven by two things, oil and coal. Crude oil makes up 24 percent of the country's exports, and coal is another 16 percent. And it has considerable natural resources, with massive oil reserves, the largest coal reserves in Latin America, significant deposits of gold, silver, platinum, nickle, and emeralds. What's more, Colombia lags behind only Brazil in terms of hydroelectic potential.

Colombia's growth, though, has been serious hampered by its political problems. The country has been mired in a low-intensity guerilla war between the government and the Revolutionary Armed Forces of Colombia (FARC) since 1964, one that's been bolstered by the ongoing drug trade. As of 2011, Colombia remained the largest producer of cocaine in the world.

Despite the ongoing guerilla war and issues with the drug trade, Colombia has managed to continue growing its economy, with GDP growth reaching 8 percent by 2008, dipping with the global recession, but recovering to 4.3 percent by last year.




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