Latin America ETFs Get Respect Now

Latin American ETFs performed spectacularly during the last year. Observers point to favorable macroeconomic factors as well as better government management of economies. Do they reinforce each other, and can this synergy continue to produce high returns?

The iShares S&P Latin America 40 Index (AMEX:ILF) and the iShares MSCI Mexico (Free) Index (AMEX:EWW) funds are trading just below their 52 week highs. The iShares MSCI Brazil (Free) Index (AMEX:EWZ) has deflated 7% from its high in January, but has resumed its climb. Latin American economies are no longer small or so poorly managed. Brazil and Chile, rich in natural resources, and Mexico, a reliable trading partner with the U.S., are powering forward under democratically elected governments. Corruption, inflation and high interest rates have been replaced with greater integrity and economic stability. In contrast, Argentina is slowly recovering from its currency debacle and Venezuela remains at risk because of its government and business climate, as well as its GDP declining and rising inflation.

The markets have shown their enthusiasm for the changes that have been made in these emerging countries. ETF returns for the region in 2003 were overwhelmingly positive, as seen below, and this optimism, although tempered, has continued through the first quarter of 2004.

*YTD Return through 03/31/04. Source: Morningstar, Yahoo! Finance, ETFzone.com

Political and fiscal reforms throughout Latin American nations and favorable economic factors are generally credited with returns such as above. Low interest rates at home and abroad have lowered the debt repayment burden for governments and companies, a direct relief on taxes and a boost to profits. The dollar has weakened considerably, abating devaluation pressures. Commodities are also strong; demand for metals has surged and the price of oil is at all time highs.

Growth for Brazil's GDP is predicted by the IMF to be 3.5% for 2004. The inflation rate is projected to be 5.9%. Civil unrest over the pace of President Lula's land reform and slower than expected growth have diminished the president's popularity. Still, many observers are optimistic over the long term: Brazil's interest rates are low, tax reform is in the works and inflation is stable. Industrial output slowed in February, but exports led by aluminum and grain rose to record highs in March (Bloomberg).

The GDP of Mexico is projected by the IMF to grow at about 3% in 2004 and inflation will increase prices by 4.3%. The rise in oil prices should have a positive effect on the economy. Yahoo! Noticias Mexico reported increases in oil production and in manufacturing jobs in early 2004.

The IMF predicts that Argentina will see a 5.5% growth in GDP in 2004, and inflation is predicted at 6.7%. The domestic economy is improving: Yahoo! Noticias Argentina reported that 68.2% of retailers expect to see sales increase in the next three months, and have already reported a 38% increase from February to March. But there are still some obstacles to recovery; for instance, supply shortfalls of natural gas have created power shortages at generating plants.

Though Venezuela stands to benefit from high oil prices, it continues to be wracked by internal dissent and instability as President Chavez remains in his unpopular presidency. According to the IMF, the GDP in 2003 was negative, but is expected to grow at 8.8% in 2004. Inflation is expected to increase at a 29.3% rate in the coming year.

Prices for the Latin America ETFs may be at their highs, but the outlook for the region continues to be positive. If stabilization efforts, political reforms, anti-corruption measures and increased global commerce continue, they will fuel the economies in these countries.